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- 1 Money and Banking Class 12 Notes PDF
- 2 Money and Banking Notes
- 2.1 What is Money?
- 2.2 Functions of Money
- 2.3 Draw Backs of Barter System
- 2.4 Money Supply
- 2.5 High Powered Money
- 2.6 Money Creation, Deposit Creation, Credit Creation by Commercial Bank
- 2.7 Money Multiplier
- 3 Central Bank
- 3.1 Functions of Central Bank
- 3.2 Quantitative Instruments
- 3.3 Qualitative Instruments
- 4 FAQ Related to Money and Banking
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Money and Banking Class 12 Notes PDF
NCERT Class 12 Economics Chapter National Income and Related Aggregates Notes PDF CBSE Class 12 Macroeconomics chapter 4 Money and Banking Class 12 Notes Pdf are made by research of last ten years NCERT question paper. Further, they are all designed with the latest CBSE guidelines 2021-2022 and only important topics are covered because of high chances to appear in exams.
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Money and Banking Notes
What is Money?
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country. The main functions of money are distinguished as a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment. Any kind of object or secure verifiable record that fulfils these functions can be considered money.
Functions of Money
- Medium of Exchange: It can be used in making payments for all transactions of goods and services.
- Measure Unit of value: It helps in measuring the value of goods and services. The value is usually called as price. After knowing the value of goods in single unit (price) exchanges become easy.
- Standard of Deferred Payments: Deferred payments referred to those payments which are to be made in near future. Money acts as a standard deferred payment due to the following reasons: a) Value of money remains more or less constant compared to other commodities. b) Money has the merit of general acceptability. c) Money is more durable compare to other commodity.
- Store of Value: Money can be stored and does not lose value Money acts as a store of value due to the following reasons: a) It is easy and economical to store. b) Money has the merit of general acceptability. c) Value of money remains relatively constant.
Draw Backs of Barter System
These are the drawbacks of the barter system which are:
Medium of Exchange:
Medium of Exchange: Money has removed the major difficulty of the double coincidence of wants.
Measure of Value
Measure of value: Money has become a measuring rod to measure the value of goods and services and is expressed in terms of price.
Store of Value
Store of Value: It is very convenient, easy and economical to store the value and has got general acceptability which was lacking in the barter system.
Standard of Deferred Payments
Standard of Deferred Payments: Money has simplified the borrowing and lending of operations which were difficult under the barter system. It also encourages capital formation.
Money supply refers to the total volume of money held by the public at a particular point of time in an economy.
- M1=currency held by public + Demand deposits + other deposits with Reserve Bank of India.
- M2=M1+saving deposits with post office saving bank
- M3=M1+net time deposit with the bank
- M4=M3 + total deposits with post office saving bank excluding national saving certificate.
High Powered Money
High powered money: Refers to, currency with the public (notes +coins) and a cash reserve of banks.
Money Creation, Deposit Creation, Credit Creation by Commercial Bank
Let us understand the process of credit creation with the following example.
Suppose there is an initial deposit of Rs. 1000 and L.R.R. are 20% i.e., the banks have to keep Rs. 200 and lend Rs. 800/-. All the transactions are routed through banks. The borrower withdraws his Rs. 800/- for making payments which are routed through banks in the form of deposits account.
The Bank receives Rs. 800/- as deposit and keeps 20% of Rs.800/- i.e., Rs.160/- and lends Rs.640/-. Again the borrower uses this for payment which flows back into the banks thereby increasing the flow of deposits.
|Deposits (in Rs.)||Loans (in Rs.)||Cash Reserve Ratio (20%)|
Money Multiplier = 1/LRR. In the above example, LRR is 20% i.e., 0.2, so the money multiplier is equal to 1/0.2=5.
Why only a fraction of deposits is kept as Cash Reserve? a) All depositors do not withdraw the money at the same time. b) There is a constant flow of new deposits into the banks.
Central Bank: An apex body that controls, operates, regulates and directs the entire banking and monetary structure of the country
Functions of Central Bank
These are the functions of the central bank given below:
- Currency Authority or Bank of Issue
- Banker to the Government
- Banker’s Bank and Supervisor
- Controller of Money Supply and Credit
- Custodian of Foreign Exchange Reserves
The central bank is the sole authority to issue currency in the country. Central Bank is obliged to back the currency with assets of equal value (usually gold coins, gold bullions, foreign securities etc.,) Advantages of sole authority of note issue:
- Uniformity in note circulation.
- Better supervision and control.
- It is easy to control credit.
- Ensures public faith.
- Stabilization of internal and external value of currency.
Banker to the Government
As a banker, it carries out all banking business of the Government and maintains a current account for keeping cash balances of the government. Accepts receipts and makes payments for the government. It also gives loans and Advances to the government.
Banker’s Bank and Supervisor
Acts as a banker to other banks in the country:
- Custodian of cash reserves:- Commercial banks must keep a certain proportion of cash reserves with the central bank (CRR).
- Lender of last resort: – When commercial banks fail to need their financial requirements from other sources, they approach Central Bank which gives loans and advances.
- Clearing house: – Since the Central Bank holds the cash reserves of commercial banks it is easier and more convenient to act as clearing house of commercial banks.
Controller of Money Supply and Credit
Central Bank or RBI plays an important role during times of economic fluctuations. It influences the money supply through quantitative and qualitative instruments. The former refers to the volume of credit and the latter refers to regulating the direction of credit.
Custodian of Foreign Exchange Reserves
Another important function of the Central Bank is the custodian of foreign exchange reserves. Central Bank acts as custodian of the country’s stock of gold and foreign exchange reserves. It helps in stabilizing the external value of money and maintaining a favourable balance of payments in the economy.
Bank Rate Policy
It refers to the rate at which the central bank lends money to commercial banks as a lender of the last resort. Central Bank increases the bank rate during inflation (excess demand) and reduces the same in times of deflation (deficient demand).
Open Market Operations
It refers to the buying and selling of securities by the Central Bank from/ to the public and commercial banks. It sells government securities during inflation/excess demand and buys the securities during deflation/deficient demand.
Legal Reserve Ratio
R.B.I. can influence the credit creation power of commercial banks by making changes in CRR and SLR.
- Cash Reserve Ratio (CRR): It refers to the minimum percentage of net demand and time liabilities to be kept by commercial banks with central bank. Reserve Bank increases CRR during inflation and decreases the same during deflation.
- Statutory Liquidity Ratio (SLR): It refers to minimum percentage of net demand and time liabilities which commercial banks required to maintain with themselves. SLR is increased during inflation or excess demand and decreased during deflation or deficient demand.
Margin Requirements: It is the difference between the amount of loan and the market value of the security offered by the borrower against the loan. Margin requirements are increased during inflation and decreased during deflation.
Moral Suasion: It is a combination of persuasion and pressure that the Central Bank applies to other banks in order to get them act in a manner in line with its policy.
Selective Credit Controls
Selective Credit Controls: Central Bank gives direction to other banks to give or not to give credit for certain purposes to particular sectors.
What is money and banking?
Money is a thing that is commonly accepted as a medium of exchange. Banking is Banks are financial institution that accepts deposits from the public and provide loans facilities for investment with the aim of earning profit.
What are the 4 types of money?
These are three types of money Fiat Money, Fiduciary Money, Full Bodied Money, Credit Money, Digital money.
What is called banking?
Banks are financial institution who accepts deposits from the public and provide loans facilities for investment with the aim of earning profit.