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INDIAN ECONOMY ( ZIA SIR ) > 9.Money and Banking > Flashcards

9.Money and Banking Flashcards

1
Q

Why do we need money according to the ‘Liquidity Preference Theory’?

A

According to the ‘Liquidity Preference Theory’ by J.M. Keynes, people need money for transactive, speculative, and precautionary motives.

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2
Q

What is the transactive motive for holding money?

A

The transactive motive refers to holding money for daily transactions like buying goods and services.

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3
Q

Why do we need money?

A

We need money for three reasons:

  • Transactive motive: to buy goods and services.
  • Speculative motive: to invest and grow wealth.
  • Precautionary motive: to have a reserve for unforeseen expenses.
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4
Q

What is a bank?

A

A bank is a financial institution that accepts deposits and lends money.

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5
Q

What is the speculative motive for holding money?

A

The speculative motive involves holding money for investment purposes to grow wealth over time.

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6
Q

What is the precautionary motive for holding money?

A

The precautionary motive involves holding money as a reserve to cover unforeseen expenses.

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7
Q

What are the two types of bank deposits?

A

The two types of bank deposits are time deposits and demand deposits.

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8
Q

What is a time deposit?

A

A time deposit is a deposit that cannot be withdrawn before a certain period of time.

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9
Q

What is the role of banks?

A

Banks are financial institutions that accept deposits and provide loans.

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10
Q

What are deposits and loans in the context of banking?

A

Deposits are liabilities to banks, while loans given by banks are considered as their assets.

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11
Q

What is a demand deposit?

A

A demand deposit is a deposit that can be withdrawn at any time.

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12
Q

What are the liabilities of a bank?

A

The liabilities of a bank are the debts that the bank owes to its customers.

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13
Q

What are the assets of a bank?

A

The assets of a bank are the things that the bank owns, such as loans, investments, and buildings.

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14
Q

What is the role of banks in the economy?

A

Banks play an important role in the economy by providing loans to businesses and individuals, and by facilitating the exchange of money.

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15
Q

What are the types of bank deposits?

A

The types of bank deposits include time deposits and demand deposits.

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16
Q

What are time deposits?

A

Time deposits involve a specific time element and include options like fixed deposits and recurring deposits.

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17
Q

What are the different types of banks?

A

There are many different types of banks, including commercial banks, savings banks, and investment banks.

18
Q

What are the benefits of using a bank?

A

There are many benefits to using a bank, including convenience, security, and financial services.

19
Q

What are demand deposits?

A

Demand deposits allow customers to deposit and withdraw money at any time; examples include savings accounts and current accounts.

20
Q

What do banking/financial institutions represent in terms of money?

A

Banking/financial institutions represent the supply side of money by engaging in various financial activities like transactions and loans.

21
Q

What is monetary aggregate?

A

Monetary aggregate is a measure of the money supply in the economy. It is calculated by the Reserve Bank of India (RBI) and is used to track the state of the economy.

22
Q

What are the four measures of monetary aggregate used by RBI?

A

The four measures of monetary aggregate used by RBI are:

  • M1: Cash with the public + Demand deposits with banks + Other deposits with RBI
  • M2: M1 + Post office deposits
  • M3: M1 + Time deposits with banks + Other deposits with RBI
  • M4: M3 + Post office deposits
23
Q

What is a monetary aggregate?

A

A monetary aggregate is a measure of money supply in the economy, controlled by the Reserve Bank of India.

24
Q

How many measures does the RBI use to calculate the money supply in an economy?

A

The RBI uses four measures to calculate the money supply: M1, M2, M3, and M4.

25
Q

What does M1 include?

A

M1 includes cash/coins with the public, demand liabilities with banks, and other deposits with the RBI.

26
Q

What is liquidity?

A

Liquidity refers to the ease of converting assets, commodities, or instruments into cash.

27
Q

What is narrow money?

A

Narrow money is a measure of the most liquid forms of money in the economy. It includes M1 and M2.

28
Q

What is broad money?

A

Broad money is a measure of all the different types of money in the economy. It includes M3 and M4.

29
Q

What is high-powered money?

A

High-powered money is the total amount of money in the economy that is created by the central bank. It includes currency in circulation and demand deposits held by commercial banks at the central bank.

30
Q

What is the difference between narrow money and broad money?

A

M1 and M2 together are called narrow money, while M3 and M4 together are referred to as broad money.

31
Q

What is High Powered Money?

A

High Powered Money, denoted as M0, is also known as reserve money or the monetary base.

32
Q

What is the money multiplier?

A

The money multiplier is the maximum amount of money that can be created by commercial banks based on a fixed amount of base money and the reserve ratio.

33
Q

How is the money multiplier calculated?

A

The money multiplier is calculated as the reciprocal of the reserve ratio (1/r), where ‘r’ is the reserve ratio banks must maintain.

34
Q

What is the money multiplier?

A

The money multiplier is the amount of money that can be created by commercial banks for every unit of high-powered money. It is calculated by dividing 1 by the reserve ratio.

35
Q

What is the reserve ratio?

A

The reserve ratio is the percentage of deposits that commercial banks are required to keep with the central bank.

36
Q

What is the role of monetary aggregates in the economy?

A

Monetary aggregates play an important role in the economy by facilitating economic activity. They are used to measure the liquidity of the economy and to track the growth of the money supply.

37
Q

What is the current reserve ratio in the Indian economy?

A

The current reserve ratio in the Indian economy is 22%.

38
Q

How is the money multiplier calculated with a 22% reserve ratio?

A

The money multiplier is calculated as 1 / (22/100) = 4.5.

39
Q

How does the RBI control the money supply?

A

The RBI controls the money supply by using a variety of tools, such as open market operations, repo rates, and reverse repo rates.

40
Q

What are the implications of a change in the money supply?

A

A change in the money supply can have a number of implications for the economy, such as inflation, interest rates, and economic growth.

INDIAN ECONOMY ( ZIA SIR ) (10 decks)

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