9.Money and Banking

Question 1

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

Answer 1

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

Question 2

What is the transactive motive for holding money?

Answer 2

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

Question 3

Why do we need money?

Answer 3

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.

Question 4

What is a bank?

Answer 4

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

Question 5

What is the speculative motive for holding money?

Answer 5

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

Question 6

What is the precautionary motive for holding money?

Answer 6

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

Question 7

What are the two types of bank deposits?

Answer 7

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

Question 8

What is a time deposit?

Answer 8

A time deposit is a deposit that cannot be withdrawn before a certain period of time.

Question 9

What is the role of banks?

Answer 9

Banks are financial institutions that accept deposits and provide loans.

Question 10

What are deposits and loans in the context of banking?

Answer 10

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

Question 11

What is a demand deposit?

Answer 11

A demand deposit is a deposit that can be withdrawn at any time.

Question 12

What are the liabilities of a bank?

Answer 12

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

Question 13

What are the assets of a bank?

Answer 13

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

Question 14

What is the role of banks in the economy?

Answer 14

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

Question 15

What are the types of bank deposits?

Answer 15

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

Question 16

What are time deposits?

Answer 16

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

Question 17

What are the different types of banks?

Answer 17

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

Question 18

What are the benefits of using a bank?

Answer 18

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

Question 19

What are demand deposits?

Answer 19

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

Question 20

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

Answer 20

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

Question 21

What is monetary aggregate?

Answer 21

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.

Question 22

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

Answer 22

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

Question 23

What is a monetary aggregate?

Answer 23

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

Question 24

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

Answer 24

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

Question 25

What does M1 include?

Answer 25

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

Question 26

What is liquidity?

Answer 26

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

Question 27

What is narrow money?

Answer 27

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

Question 28

What is broad money?

Answer 28

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

Question 29

What is high-powered money?

Answer 29

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.

Question 30

What is the difference between narrow money and broad money?

Answer 30

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

Question 31

What is High Powered Money?

Answer 31

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

Question 32

What is the money multiplier?

Answer 32

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.

Question 33

How is the money multiplier calculated?

Answer 33

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

Question 34

What is the money multiplier?

Answer 34

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.

Question 35

What is the reserve ratio?

Answer 35

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

Question 36

What is the role of monetary aggregates in the economy?

Answer 36

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.

Question 37

What is the current reserve ratio in the Indian economy?

Answer 37

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

Question 38

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

Answer 38

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

Question 39

How does the RBI control the money supply?

Answer 39

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

Question 40

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

Answer 40

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