Long Questions and Answers:
Q.1. What is the relationship
between transaction demand for money and value of transactions?
Ans: Money
is the most liquid form of asset. A person can convert it into anything
whenever he likes. Thus, the demand for money is the demand for its liquidity
preference or the demand for holding cash.
Transaction
demand for money is the amount of money required for current transactions of
individuals and firms. It is determined by the level of transaction demand for
money of the economy is fraction of total value (volume) of transaction over a
unit period of time.
Symbolically:
M d = K.T
T
It
shows that transaction demand for money is a positive fraction (K) of total
value of transactions (T).
Q.2. What are Commercial
Banks?
Ans: A
commercial bank is a financial institution which performs the functions of
accepting deposits from the general public and giving loans for investment with
the aim of earning profit. It receives deposits from those who want it to be
kept safely and to earn interest on it. Thus, it borrows money. It also lends
money to merchants and manufacturers. Since purchase and sale are credit
operations, commercial banks are defined as institutions dealing in credit and
money.
According to
Prof. Cairn cross, "A bank is a financial intermediary, a dealer in loans and
advances".
Q.3. Bank provides various
facilities to the public. What are the general functions performed by
commercial banks?
Ans: Banks
provide many general utility services. Some of which are as follows:
a.
Providing locker
facility to its customers to safeguard their valuable items.
b.
Purchase and sale
of foreign exchange to promote international trade.
c.
Banks issue letters
of credit to their customers to certify their credit worthiness.
d.
Banks issue
traveller’s cheques and gift cheques.
Q.4. Why did money evolve as a
medium of exchange?
Ans: There was a time, when money was not in use,
and goods were exchanged directly with other goods. Such a system was
called barter system of exchange. The barter system had many
difficulties like, double co-incidence of wants, common measure of value and
divisibility. The inconveniences and drawbacks of barter system led to the emergence
of money as a common medium of exchange and a measure of value. Goods are now
exchanged with the help of use of money.
Q.5. How can you define money
on the basis of its functions performed?
Ans: Money
performs various functions. Accordingly, money is defined as "money is
what money does". It means anything, which is generally accepted in
payment and is generally used as a medium of exchange is called money. If goods
is generally accepted in payment, and generally used as a medium
of payment, it should be treated as money.
Functions of
money are reflected as; Money is a matter of functions four, a medium, a
measure, a standard, and a store. Thus, money acts as common medium of
exchange, a common measure of value, as standard of deffered payments and a
store of value.
Q.6. Banks perform various
functions. What are the general functions, performed by a bank?
Ans:
A bank provides many general utility services. Some of which are as
follows:
a.
Providing locker
facility to its customers so that they can keep their valuables in safe custody b.
Purchase and sale
of foreign exchange c.
Issue of
traveller’s cheques and gift cheques d.
Banks help in
transportation of goods from the production centres to the consumption centres.
Q.7. Commercial banks perform
various functions. What are the main functions of a commercial bank?
Ans: Following
are the important functions of a commercial bank –
a.
It accepts
deposits i.e. savings of the public
b.
It gives loans
and advances to businessmen and entrepreneurs.
c.
It provides
overdraft facility.
d.
It discounts
bills of exchange or Hundis
e.
It performs
various agency functions, like transfer of funds, collection of funds, payment
of various items, purchase and sale
of shares and securities, collection of dividends, interest on shares and debentures
etc.
Q.8. Explain the function of
overdraft facility as provided by commercial banks?
Ans: An
overdraft is an advance given, by allowing a customer keeping current account
to overdraw his current account, up to an agreed limit. It is a
facility to a depositor for overdrawing the amount, more than the balanced
amount in his account. Under overdraft facility, a depositor can get more than
the amount of his current account deposit but he has to pay interest on the
extra amount withdrawn, which has to be paid back within a short period. This
overdraft facility is provided in lieu of some kind of security, which can be
in the form of financial assets like shares, debentures, life insurance
policies etc.
Q.9. Explain the function of
discounting bill of exchange or Hundis by the commercial banks.
Ans: A
bill of exchange is a document, acknowledging an amount of money, owned in
consideration of goods received. It is a paper asset, signed by debtor and the
creditor for a fixed amount payable on a fixed date. For example; if person A buys goods from
person B, he may not pay to B immediately, but instead he can give B a bill of
exchange, stating the amount of money owned, and the time, when A will settle
the debt. The settlement is done on the stated time. This is called a bill of
exchange.
Q.10. Explain the function of
issuing currency by the central bank.
Ans: The
central bank is given the sole authority by the government of issuing currency,
in order to secure control over volume of currency and credit. It has to keep
certain amount of reserve in the form of gold and foreign securities as per
statutory rules against the notes issued. RBI issues all currency notes in
India from Rs 2 and above. Small coins are issued by government mints.
The
government of the country is usually authorized to borrow from the central
bank. If the Govt. expenditure exceeds its revenue and the government is unable
to reduce its expenditure, then it can borrow from central bank by selling
security bills to RBI which creates new currency notes.
Q.11. How
does Central bank acts as a controller of credit and money supply?
Ans: It
is an important function of central bank to control credit and money supply
through its monetary policy. Central bank has a monopoly of issuing notes and thereby,
it can control the volume of currency in the economy. It controls money supply
and credit by adopting quantitative measures and qualitative measures like,
controlling the interest rate on deposits and loans, controlling the statutory
liquidity ratio, buying and selling securities etc.
Q.12. What
is meant by Clearing House Function?
Ans: Commercial
banks receive cheques, drawn on the other banks from their
customers, which they have to realize from drawee banks. Similarly, cheques are
drawn and passed into the hands of other banks, which they have to realize from
the drawee banks. Independent and separate realization to each cheque would
take a lot of time and therefore, central banks provide cheque clearing
facility, wherein every bank together everyday sets off their claims. This is
known as clearing house function.
Q.13. How
is money a dynamic factor?
Ans: Money
is a dynamic factor because:
a. It has facilitated exchange beyond limits
b. It has facilitated accumulation of wealth for
purpose of investment
c. It has facilitated flow of capital from one
place to the other place, and from one country to another country.
Thus, money is a
dynamic factor because it helps economic stability, and promotes the process of
growth and development.
Q.14. What are the measures
of money supply?
Ans: In India there
are four concepts of money supply. Reserve Bank of India uses four
alternative measures of money supply called as M1, M2, M3 and
M4. Each measure is briefly explained below:
a.
M1 =
C + DD + OD: Here C denotes currency held by public. DD stands for demand
deposits in banks (inter
bank deposits are
not included) and OD stands for other deposits with RBI. Demand deposits are
deposits which can be withdrawn at any time on demand by account holders.
b.
M2 =
M1 (detailed above) + Savings deposits with Post Office Saving
Banks.
c.
M3 =
M1 + Net Time deposits of Banks
d.
M4 =
M3 + total deposits with Post Office Saving Organisation
(excluding NSC)
Q.15. Explain the functions of
money.
Ans: Functions
of money are as follows:
a.
Money as the
medium of exchange: Medium of
exchange is the basic or primary functions of money. Money acts as a medium
of exchange or as a medium of payments.
b.
Money as a unit
of account: Money serves as
unit of account or a measure of value. Money is the measuring rod, i.e., it is the unit in terms of which
the values of other commodities and services are measured and expressed.
c.
3.Money as the
standard of deferred payments : The
use of money as the standard of deferred or delayed payments
immensely simplify borrowings and lending operations and thereby, facilitate
the formation of capital markets and the work of financial intermediaries like
Stock Exchange, Investment Trust and Banks.
d.
Money as a store
of value: Money can
store value of goods in liquid form. By spending it we can purchase any commodity in
future.
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