By DeeCee – Divine Classes

Money & Banking

By DeeCee – Divine Classes
Barter Exchange :
It refers to exchange of goods for goods.
Barter Economy:
An Economy where there is a direct barter of goods &
services.

Limitations of Barter Exchange

a) Lack of Double co-incidence of wants.
b) Lack of Common measure of value
c) Lack of store of value
d) Lack of Standard of deferred payments.
By DeeCee – Divine Classes
Money : -
Money is anything which is generally accepted as a
medium of exchange , measure of value, store of value
and standard of deferred payments.

Functions

Primary Secondary

Medium of
Store of value
Exchange

Standard of
Measure of
deferred
value
payments
By DeeCee – Divine Classes Money Supply:
• It refers to total volume of money held by public at a
particular point of time.
• It is a stock concept.
Measures of money supply
• M1 = Currency and coins held by Public + demand
deposits of commercial banks + other deposits
with R.B.I
• M2 = M1 + Saving deposits with Post office saving
banks
• M3 = M1 + Net time deposits with Banks
• M4 = M3 + Total deposits with post office saving Banks
By DeeCee – Divine Classes Money Multiplier
It refers to the amount of money that banks are able to
create in the form of deposits.
1
Money Multiplier =
𝐿𝑅𝑅
By DeeCee – Divine Classes
Banking :-
Commercial Bank
It is an institution which performs the functions of
Accepting deposits , lending funds and making investments
with the main aim of earning profits.
Functions

Primary Secondary

Accepting Agency functions

deposits

Advancing Discounting bills

loans of exchange

Overdraft facility

General utility functions

By DeeCee – Divine Classes Primary Functions
1. Accepting deposits
• The main function of a commercial bank is to accept
various kinds of deposits.
Demand Deposits Fixed Deposits Saving Deposits
Deposits repayable on Amount deposited for a Combines the features of
demand fixed period of time both
No restriction on number 2 transactions Limited no. of transactions
of transactions
Cheque facility available Not available Available
Business firms Households Households
Not provided Highest Interest is provided
By DeeCee – Divine Classes
2. Advancing of loans
Type of loans
• Cash Credit
Loan given against + Current assets
Interest is charged on Amount actually withdrawn
• Demand Loans
Loans which can be recalled by bank on demand
• Short term Loan
These are given as personal loans against some
collateral security
By DeeCee – Divine Classes Secondary Functions
1. Agency functions
It includes
• Transfer of funds
• Collection and payment of various items
• Purchase and sale of securities
• Income tax consultancies

2. Discounting Bills of Exchange

• A facility in which a holder of bill can get the bill
discounted with bank before maturity.
By DeeCee – Divine Classes 3. Overdraft facility
• A facility in which a customer is allowed to overdraw
his current account upto an agreed limit.
• Provided only to respected & reliable customers for a
short period of time.

4. General utility functions

It includes
• Locker facility
• Traveller's cheque
• Letter of credit etc.
By DeeCee – Divine Classes Central Bank
• It is an “apex body” that control, operates, regulates
and directs the entire banking and monetary structure
of the country.
• All the financially developed countries have their own
central bank.
• For example :- RBI in India
Bank of England in U K
Federal Reserve System in U S A

Functions

Currency Banker to the Controller of Custodian of

Banker’s bank
money supply & foreign exchange
Authority Government and supervisor
credit reserves
By DeeCee – Divine Classes Functions
1. Currency Authority / Bank of Issue
• Central Bank has the sole authority for issue of
currency in the country.
• In India RBI issues currency (Except one rupee notes &
coins)
Advantages
• Leads to uniformity in notes circulation
• Ensures Public faith
• Gives central Bank the power to influence money
supply.
By DeeCee – Divine Classes
2. Banker to the Government
• RBI acts as a banker, agent & financial advisor to the
govt.
As a banker
• Maintains a Current A/c
• All the receipts and payments are done
• It gives loans & advance to govt.
As an Agent
• Responsible for managing public debts.
As a financial advisor
• Advices govt. on various monetary matters.
By DeeCee – Divine Classes
3. Banker’s Bank & Supervisor
• Central bank regulates & supervises all the commercial
Banks.
• It Bears same relationship with commercial banks as
the commercial Banks maintains with Public.
• As a banker it performs in 3 capacities
1) Custodian of cash reserves
2) Lender of last resort
3) Clearing house
As a supervisor, it regulates & controls commercial
banks.
By DeeCee – Divine Classes
4. Custodian of foreign Exchange reserves
• Central Bank acts as Custodian of country’s Gold &
Reserves of foreign exchange
• According to Regulations of Foreign Exchange, all
foreign Exchange transactions must be routed through
RBI.

5. Controller of money supply and credit

Due to economic fluctuations RBI control money supply
& credit in the best interest of the economy.
By DeeCee – Divine Classes
Multiple Choice Questions (MCQs):
Q 1. Money supply in India is:
a) Currency with the public
b) Demand deposits with the banks
c) Currency with the public + Demand deposits with the
banks
d) None of them

Q 2. Which out of the following items is not included in

money supply of a country?
a) Time deposits
b) Coins and currency
c) Demand deposits
d) None
By DeeCee – Divine Classes
Q 3. A system in which commodities are exchanged for
commodities is called:
a) Barter system of exchange
b) Monetary system of exchange
c) Commodity for commodity exchange economy
d) Both (a) & (c)

Q 4. Which of the following is the basic characteristic of

the barter system of exchange ?
a) Medium of exchange
b) Double coincidence of wants
c) Store of value
d) Both (a) & (c)
By DeeCee – Divine Classes
Q 5. C – C economy refers to that system where:
a) Goods are exchanged for goods
b) Goods are exchanged for domestic currency
c) Goods are exchanged for foreign currency
d) Goods are not exchanged at all

Q 6. Money is :
a) Anything which requires double coincidence of wants
b) Anything which is commonly accepted as a medium of
exchange
c) Anything which is commonly accepted as a commodity
money
d) None of these
By DeeCee – Divine Classes Q 7. Evolution of money has facilitated :
a) A common unit of exchange
b) Store of value
c) Transfer of value
d) All of these

Q 8. With the introduction of money:

a) Acts of sale and purchase have been separated
b) Acts of exchange have been separated
c) Acts of production and consumption have been
separated
d) Both (b) & (c)
By DeeCee – Divine Classes Q 9. Electronic transfer of money in terms of
credit/debit entries of the account-holders in the banks
is called :
a) e-marketing
b) e-business
c) e-money
d) e-banking

Q 10. Money is a :
a) Static factor
b) Dynamic factor
c) Contingent factor
d) All of these
By DeeCee – Divine Classes
Q 11. e-money functions as a medium of exchange by
way of:
a) Transfer of value from one account to the other
b) Cash payments
c) Payments through cheques
d) All of these

Q 12. Money that is issued by the authority of the

government is called:
a) Full bodied money
b) Credit money
c) Fiat money
d) Fiduciary money
By DeeCee – Divine Classes Q 13. Money which is accepted as a medium of exchange
because of the trust between the payer and the payee is
called:
a) Full bodied money
b) Credit money
c) Fiat money
d) Fiduciary money

Q 14. Which of the following is correct?

a) Supply of money is a stock concept
b) Supply of money does not include stock of money held
by the government
c) Supply of money does not include stock of money held
by the banking system of a country
d) All of these
By DeeCee – Divine Classes Q 15. Which of the following is not a component of M1
measurement of money supply?
a) Demand deposits
b) Currency
c) Other deposits
d) Term deposits

Q 16. In India, coins are issued by :

a) State Bank of India
b) Reserve Bank of India
c) Ministry of Finance
d) Ministry of Urban development
By DeeCee – Divine Classes Q 17. Term deposits are those:
a) Against which no cheque can be issued
b) Against which no interest is paid to the depositors
c) Which are fixed deposits
d) Both (a) & (c)

Q 18. Assertion (A) : Commercial banks are the principal

suppliers of money in India.
Reason (R): RBI is the principal supplier of money in India.
a) Both A and R are true and R is the correct explanation of
A.
b) Both A and R are true but R is not the correct explanation
of A.
c) A is true but R is false.
d) A is false but R is true.
By DeeCee – Divine Classes Q 19. Assertion (A) : Measurement of value was very
difficult in the barter system of exchange.
Reason (R): Because there was no common unit of value.
a) Both A and R are true and R is the correct
explanation of A.
b) Both A and R are true but R is not the correct
explanation of A.
c) A is true but R is false.
d) A is false but R is true.
By DeeCee – Divine Classes
Q 20. Assertion (A) : In the C – C economy, saving is
possible only by way of storage of goods.
Reason (R): There is no difficulty of double coincidence
of wants in barter system.
a) Both A and R are true and R is the correct
explanation of A.
b) Both A and R are true but R is not the correct
explanation of A.
c) A is true but R is false.
d) A is false but R is true.
By DeeCee – Divine Classes Q 21. Primary deposits are :
a) Cash deposits with the commercial banks
b) Gold reserves with the commercial banks
c) Reserves of foreign exchange
d) None of these

Q 22. Commercial banks advance loans :

a) Only to the extent of their term deposits
b) Only to the extent of their gold reserves
c) Only to the extent of their demand deposits
d) Multiple times of their required cash reserves with
the RBI
By DeeCee – Divine Classes
Q 23. A commercial bank is that financial institution :
a) Which only accepts deposits from the people
b) Which only offers loans to the people
c) Which accepts deposits from the people as well as
offers loans to them
d) Which only deals in foreign exchange transactions

Q 24. Those deposits which arise on account of loans by

the banks to the people are called:
a) Primary deposits
b) Secondary deposits
c) Cash deposits
d) Term deposits
By DeeCee – Divine Classes Q 25. The central bank:
a) is an apex bank
b) is the sole agency of note-issuing
c) Focuses on stability and growth of the economy
d) All of these

Q 26. ___________ is the main source of money supply

is an economy.
a) Central bank
b) Commercial banks
c) Both (a) & (b)
d) Government
By DeeCee – Divine Classes
Q 27. Assertion (A): Money is what money does.
Reason (R): Basically, money facilitates exchange of
goods and services. Accordingly, money is defined as
‘anything that acts as a medium of exchange’.
a) Both A and R are true and R is the correct
explanation of A.
b) Both A and R are true but R is not the correct
explanation of A.
c) A is true but R is false.
d) A is false but R is true.
By DeeCee – Divine Classes Q 28. The value of Money Multiplier equals
1
a) 𝑆𝐿𝑅
1
b) 𝐶𝑅𝑅
1
c) 𝐿𝑅𝑅
d) None of these

Q 29. Demand deposits include…………………

a) Saving account deposits and fixed deposits
b) Saving account deposits and current deposits
c) Current account deposits and fixed account deposits
d) All types of deposits
By DeeCee – Divine Classes
Q 30. Which of the following item is not included in
money supply?
a) Demand deposits with banks
b) Inter Bank deposits
c) Currency and coins with public
d) Other deposits with RBI.

Q 31. Which of the following is not the function of the

central bank.
a) Banking facilities to government
b) Banking facilities to public
c) Lending to government
d) Lending to commercial banks.
By DeeCee – Divine Classes Q 32. Who act as ‘lender of last resort for commercial
bank?
a) State Bank of India
b) RBI
c) Punjab National Bank
d) None of these

Q 33. Identify which of the following bank does not

interact directly with the general public?
a) Bank of India
b) State Bank of India
c) Central Bank of India
d) Reserve Bank of India
By DeeCee – Divine Classes
Q 34. Identify which of the following is not a function of the
Reserve Bank of India?
a) To act as the banker to the Government of India.
b) To act as the custodian of the gold reserve of India
c) To act as the financial advisor to the Government of India
d) To issue coins and one rupee note

Q 35. In a hypothetical economy, Mr. Neeraj has deposited

₹100 in the bank. If it is assumed that there is no other
currency circulation in the economy, then the total money
supply in the economy will be ________________
a) zero
b) ₹ 100
c) not defined
d) ₹ 120
By DeeCee – Divine Classes Q 36. Read the following statements carefully and choose
the correct alternatives given below:
Statement 1 – The value of money multiplier is
determined by the reserve ratio prevailing in the
monetary system.
Statement 2 – The process of credit creation directly
relates to the value of reserve ratio.
Alternatives:
a) Both the statements are true.
b) Both the statements are false.
c) Statement 1 is true and Statement 2 is false
d) Statement 2 is true and Statement 1 is false
By DeeCee – Divine Classes
Q 37. Assertion (A): Demand Deposits are considered as
a convenient mode of payment for execution of even the
high value transactions.
Reason(R): Demand Deposits are non-withdrawable in
nature and cannot be withdrawn against issue of
cheques and other similar instruments of payment.
Alternatives:
a) Both Assertion (A) and Reason (R) are true and
Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and
Reason (R) is not the correct explanation of Assertion
(A).
c) Assertion (A) is true but Reason (R) is false.
d) Assertion (A) is false but Reason (R)is true.
By DeeCee – Divine Classes Q 38. Assertion (A) : Money supply in the economy
include only notes and coins issued by the central bank.
Reason (R): Money supply in the economy includes notes
and coins with the people as well as demand deposits
with the banks.
a) Both A and R are true and R is the correct explanation
of A.
b) Both A and R are true but R is not the correct
explanation of A.
c) A is true but R is false.
d) A is false but R is true.
By DeeCee – Divine Classes Q 39. Assertion (A): Both primary and secondary deposits
are demand deposits.
Reason (R): Because these can be withdrawn on demand
by writing cheques.
a) Both A and R are true and R is the correct explanation
of A.
b) Both A and R are true but R is not the correct
explanation of A.
c) A is true but R is false.
d) A is false but R is true.
By DeeCee – Divine Classes Q 40. Assertion (A): The central bank is the currency
authority.
Reason (R): The central bank is the sole-issuing authority
in the country. It has the exclusive right of note-issuing.
a) Both A and R are true and R is the correct explanation
of A.
b) Both A and R are true but R is not the correct
explanation of A.
c) A is true but R is false.
d) A is false but R is true.