Money and Banking

Question 1

What is Fractional Reserve Banking?

Answer 1

It is the practice of lending customers’ money to others on the assumption that not all customers will want their money back at any one time.

Question 2

What is Reserve Requirement?

Answer 2

It is the percentage of money needed to be retained when carrying out fractional reserve banking.

Question 3

How the total money created is calculated?

Answer 3

Total Money Created =
New deposit (Initial sum) x Money Multiplier

Question 4

What is Money Multiplier?

Answer 4

The money multiplier is a concept in economics that quantifies the maximum amount of money that a banking system can create from a given amount of base money (or reserves) supplied by the central bank.
OR it is the ratio of the Total Money Supply to the Monetary base.

Question 5

What is money?

Answer 5

Money is any generally accepted medium of exchange.

Question 6

What are the characteristics of Money?

Answer 6

1. Be readily acceptable (legal tender)
2. Have a known value
3. Be easily divisible
4. Have a high value relative to its weight
5. Be difficult to counterfeit

Question 7

What are the functions of Money?

Answer 7

1. Medium of Exchange
2. Unit of Account
3. Store of Value (A repository of purchasing power over time)
4. Standard of Deferred Payments
5. Distribution of National Income

Question 8

What is Token money?

Answer 8

Token Money is the money the face value of which is more than the intrinsic value.

Question 9

What is Money Supply?

Answer 9

It refers to the total supply of money in active circulation in a given country’s economy at a given time.
It refers to the money held by ‘public’.
It does not include producers of money (RBI, Government, Commercial banks) to avoid double counting.

Question 10

What are the measures of Money Supply?

Answer 10

M1, M2, M3 and M4

Question 11

What is M1?

Answer 11

It is the currency with public (coins, currency notes etc.) +
Net Demand Deposit held by the public with commercial banks

Question 12

Why M1 and M2 is called ‘Narrow Money’?

Answer 12

It is because money has a very narrow definition here, only emphasized as the medium of exchange and thus includes only those assets which are highly liquid.

Question 13

Are interbank deposits included in calculating M1?

Answer 13

NO
Only money deposited by public in banks are included and not what one commercial bank holds in other commercial bank i.e., Interbank Deposits

Question 14

What is M2?

Answer 14

M2 = M1 + Post Office Saving Deposits

Question 15

What is M3?

Answer 15

M3= M1 + Net Time Deposits of public with the banks

Question 16

Can depositors of time deposits borrow from the banks against it?

Answer 16

Yes!

Question 17

What if M4?

Answer 17

M4 = M3 + Total Post Office deposits (includes fixed deposits with the post offices but excludes National Savings Certificates)

Question 18

Why M3 and M4 are known as Broad Money?

Answer 18

M3 and M4 give a fuller picture of the economy’s monetary dynamics like including time deposits and other financial resources which are not readily accessible for uses at daily basis.

Question 19

What is National Savings Certificate?

Answer 19

The National Savings Certificate (NSC) is a fixed-income investment scheme offered by the Government of India, aimed at encouraging small savings among individuals while providing attractive returns.
It is a secure and low-risk savings option available at post offices across the country and is particularly popular among risk-averse investors.

Question 20

What is the eligibility and tenure of NSC?

Answer 20

Eligibility
1. Available to individual Indian residents
2. Not available for NRIs

Tenure
Current maturity period is 5 years

Question 21

What is the meaning of fiat?

Answer 21

Fiat means, “by order of some authority”.