Money & Banking case study

MONEY AND BANKING CASE STUDY Q.1 Read the following case study and answer the following: When credit is to be expanded the central bank reduces the bank rate. By this central bank encourages the commercial banks to keep small proportion of their deposits as reserve since borrowing from central bank is now less costly than before. This measure is also helpful in present COVID-19 situation also. Q-1 What is bank rate ?& who decides it? Q-2 By reducing in bank rate what is the main purpose of Central bank. Q-3 How decrease in bank rate helpful in COVID-19 situation? Ans -1 The rate at which central bank lends money to commercial bank is known as bank rate. Central bank decide bank rate. Ans-2 By reducing bank rate central bank encourages the commercial banks to keep small proportions of their deposits . Ans-3 Decrease in bank rate is helpful in situation of deflation (as in COVID-19, where demands are less), as a result banks use a greater proportion of their funds for giving out loans to borrowers or investors, which increases the money supply. Q.2 CASE STUDY – MONEY AND BANKING India officially enters technical recession, GDP contracts by 7.5 percent in Q2 of FY21 The Indian economy contracted by 7.5 percent in the second quarter of the fiscal year 2020-21 (July to September), as per government data that was released on November 27, 2020. With this contraction, India officially entered a technical recession for the first time. The contraction is a rebound from the earlier quarter of the fiscal year 2020-21. India's economy had contracted by 23.9 percent in the April to June quarter (Q1 FY21), which marked the first contraction in more than 40 years as the COVID-19 pandemic majorly impacted consumer demand and private investments .According to the Ministry of Statistics and Programme Implementation, the gross value added (GVA) came in at minus 7 percent during the second quarter of FY21. Key Details •The GDP at Constant (2011-12) Prices in Q2 of FY 2020-21 was estimated at Rs 33.14 lakh crore, as against Rs 35.84 lakh crore in Q2 of FY 2019-20. This shows a contraction of 7.5 percent as compared to 4.4 percent growth in the second quarter of the Fiscal Year 2019-20. •The quarterly GVA at Basic Prices at Constant (2011-12) Prices for the second quarter of FY 2020-21 was estimated at Rs 30.49 lakh crore, as against Rs 32.78 lakh crore in Q2 of 2019-20. This showed a contraction of 7 percent. •The second quarter of FY 2020-21 saw a -15.6 percent drop in trade, transport, communication and hotels. On the other hand, defence, public administration and other services saw a contraction of -12.2 percent. •Further, the real estate, financial and professional services sector saw a contraction of 8.1 percent and construction by 8.6 percent. Ministry of Statistics and Programme Implementation 2020 1. Repo rate is the rate at which A. Commercial bank purchases government securities from the central bank B. Commercial bank can take long term loans from central bank C. Commercial bank can keep their deposits with Central bank D. Short term loans are given by commercial bank Ans. Commercial bank can take long term loans from central bank

2. An increase in bank rate is effective to combat inflation in the context of above case study. (True/ False) justify. Ans. No, as in present situation, economy is already facing fall in purchasing power. 3. To encourage the flow of goods and services, RBI should A. Increasing bank rate C. Selling government securities by RBI B. Increasing CRR D. None of the above Ans. D. None of the above 4. In order to increase purchasing power of people to come out of the low aggregate demand trap and to increase the growth rate of GDP of economy, which of the following will increase the money supply? (a) Fall in repo rate (b) Purchase of securities in open market (c) Decrease in cash reserve ratio (d) All of these Ans. (d) All of these Q.3 Case Study Reserve Bank of India (RBI) is the central bank of the country. RBI is a statutory body. It is responsible for the printing of currency notes and managing the supply of money in the Indian economy. It plays multi-facet role by executing multiple functions such as overseeing monetary policy, issuing currency, managing foreign exchange, working as a bank of government and as banker of scheduled commercial banks, among others. It also works for overall economic growth of the country. Q1. Define a central bank. 1 Q2. Who issues the one-rupee notes and coins in the country? 1 Q3. RBI acts as the banker to the central government and commercial banks act as banker 1 to the state governments. (T/F) Q4. When commercial banks fail to meet their financial requirements from other sources, 1 the central bank provides them funds through discounting of approved securities and due to this central bank is said to be the _________________. 1 Q5. Where is headquarter of RBI? 1 Answers: 1. Central bank is an apex body that controls, operates, regulates and directs the entire banking and monetary structure of the country. 2. Ministry of Finance. 3. False 4 lender of last resort 5. Mumbai Q.4 Money supply refers to total volume of money held by the public at a particular point of time in an economy. It includes money held by the public only. The term Public signifies the money – using sector and does not include money – creating sector. Till 1967 – 68 , the RBI used only the narrow measure of money supply. But, since 1977, four measures of money supply (M1, M2, M3 and M4) have been evolved. 1. Money Supply is a ____________( Stock/ Flow) concept. 2. Who regulates Money Supply? 3. Government belongs to Money using sector . (True / False) 4. ___and _______are generally Known as Narrow money supply concept. ANS: 3. FALSE 1. STOCK 4. M1 and M2 2. RBI

Q.5 Domestic Money Supply Up 11.60% on Year 2019. India's total Money Supply (M3) stood at Rs 17804885 crores as on October 23rd 2020, recording a rise of 11.60% over the same time last year. Currency with the public stood at Rs 2619612, up 21.2% over the year and Other deposits with RBI Rs. 40717 crores. Demand deposits with banks were up 10% at Rs 1625734 crores. Time deposits with banks were also up 10% at Rs 13518822 crores. The bank credit to commercial sector rose 5.2% on year to Rs 10999604 crores. Source: Business standard, November 6th 2020 Answer the following questions 1. Money supply is ………………….concept [Stock/Flow] 2. What are the measures of money supply? 3. Which among the measures of supply is referred as narrow money and broad money? 4. From the given passage, calculate M1, M3. 5. Who produces High powered money? Solution: 1. Stock concept as it is measured at a point of time. 2. M1,M2,M3,M4 are the alternative measures of money supply 3. M1, M2 are narrow money M3 and M4 are referred as broad money 4. M1=Currency and coins with public c + Demand deposits of commercial bank+ Other deposits with RBI =Rs. 2619612 Cr+ 1625734 cr+40717 cr =Rs. 42,86,063cr M3=M1 + Time deposits with bank =Rs. 42,86,063 +13518822 =Rs. 1,78,04,885 Cr 5. High powered money is money produced by the RBI and the government. It consists of two things (i) Currency held by public and (ii) Cash reserve with the banks Q.6 Case Study Base Question The battle with COVID-19 is not only to save the country and its people but also to ensure that the banking channels are working round the clock to cater to the needs of the public as well as financial market. Needless to say, that banking system is the backbone of any country and its failure or slowdown could lead to multiple issues for developing countries like India. Hence, in order to ease out the unforeseen difficulties being faced by numerous sectors, Reserve Bank of India (RBI) being the central bank of the country came up with a number of measures and reliefs post nationwide lockdown which have been discussed in this article at length. Q1. Explain the any four major functions of central bank. Answer: Functions of a Central Bank. Main functions of a Central Bank are to act as governor of the machinery of credit in order to secure stability of prices. It regulates the volume of credit and currency, pumping in more money when market is dry of cash, and pumping out money when there is excess of credit. Broadly, a central bank has two departments, namely, issue department and banking department We discuss below its main functions. 1. Issue of Currency. The central bank is given the sole monopoly of issuing currency in order to secure control over volume of currency and credit. These notes circulate throughout the country as legal tender money. Note-issuing is governed by Minimum Reserve System i.e. while issuing currency notes, a minimum fixed amount of gold and foreign currency is kept by Central Bank. It has to keep a reserve in the form of gold and foreign securities as per statutory rules against the notes issued by it. It may be noted that RBI issues all currency notes in India except one rupee note. Again it is under directions of RBI that one rupee notes and small coins are

issued by government mints. Remember, central government of a country is usually authorized to borrow money from the central bank. When central government expenditure exceeds government revenue and Govt. is unable to reduce its expenditure, then it borrows from RBI. This is done by selling security bills to RBI which creates new currency notes for the purpose. This is called monetization of budgetdeficit or deficit financing. The government spends new currency and puts it into circulation to meet its expenditure. 2. Banker to the Government. Central Bank functions as a banker to the government— both central and state governments. It carries out all banking business of the government. Governments keep their cash balances in the current account with the central bank. Similarly, central bank accepts receipts and makes payment on behalf of the governments. Also central bank carries out exchange, remittance and other banking operations on behalf of the government. Central bank gives loans and advances to governments for temporary periods, as and when necessary and it also manages the public debt of the country. 3. Bankers' Bank and Supervisor. There are usually hundreds of banks in a country. There should be some agency to regulate and supervise their proper functioning. This duty is discharged by the central bank. Central bank acts as banker's bank in three capacities: (i) it is custodian of their cash reserves. Banks of the country are required to keep a certain percentage of their deposits with the central bank; and in this way the central bank is the ultimate holder of the cash reserves of commercial banks. (ii) Central bank is lender of last resort. Whenever banks are short of funds, they can take loans from the central bank and get their trade bills discounted. Thus Central Bank is a source of great strength to the banking system. (iii) It ads as a bank of central clearance, settlements and transfers. Its moral persuasion is usually very effective so far as commercial banks are concerned. 4. Controller of Credit and Money Supply. It is an important function of a Central Bank to control credit and money supply through its monetary policy. There are two parts of monetary policy, viz., currency and credit. Central Bank has monopoly of issuing notes and thereby can control the volumes of currency. Main objective of credit control function of a Central Bank is stabilizing of price level. It controls credit and money supply by adopting quantitative measures and qualitative measures which are discussed in part (h) 2 of Q. 8.21. Let us, recollect the following three quantitative measures, namely, (0 Bank Rate, (ii) Open Markel Operations, and (iii) CRR which influence credit availability and credit creation. Mind, credit creation refers to lending by commercial banks. Following are instruments of monetary policy of RBI. Case based questions Q.7 Read the following case study paragraph carefully and answer the questions on the basis of the same. The central bank of India i.e. Reserve Bank of India, is the apex institution that control the financial market. It's one of the major functions is to maintain the reserve of foreign exchange Also it intervenes in the foreign exchange market to stabilise the excessive fluctuations in the free exchange rate. In other words, it is the central bank's job to control a country's economy through monetary policy, if the economy is moving slowly or going backward, there are steps that central bank can take to be the economy. These steps, whether they are asset purchases or printing more money, all involve injecting more cash into the economy. The simple supply and demand economic projection occurs currency will devalue. When the opposite occurs, and the economy is growing, the central bank will use various method keep that growth steady and in-line with other economic factors such as wages and prices. Whatever the central bank does or in fact don't do, will affect the currency of that country. Sometimes, it is within the central bank's interest to purposefully effect the value of a currency. For example, if the economy is heavily reliant on exports and their currency value becomes too high, importers of country's commodities will seek cheaper supply; hence directly effecting the economy.

1. Which of the following tools are used by the central bank to control the flow of money in the domestic economy? (a) Quantitative monetary tools (b) Qualitative monetary tools (c) Fiscal tools (d) Both (b) and (c) ANS - D 2. Increase in the foreign exchange reserves are recorded in _______(credit/debit) side of the BOP. ANS -DEBIT 3. Which of the following steps should taken by the central bank if there is excessive rise in the foreign exchange rate? (a) Supply foreign exchange from its stock (b) Demand more of other foreign exchange (c) Not intervene in the market as exchange rate is determined by the market forces (d) Help central government to stabilise foreign exchange rate ANS – A 4. Dear money policy of central bank, which is used to keep the growth steady and in line with other economic factors, refers to (a) Tighten the money supply in the economy (b) Ease the money supply in the economy (c) Allow commercial banks to work under less strict environment (d) Both (b) and (c) ANS-A Q8. CASE STUDY: Commercial banks demand deposits are a part of money supply. Commercial banks lend money to the borrowers by opening demand deposit account in their names. The borrowers are free to use this money by writing cheques. According to definition demand deposits are a part of money supply. Therefore, by creating additional demand deposits bank create money. Money creation depends on two factors: Primary deposits and legal reserve ratio. Deposit multiplier 1/LRR, Total deposit creation=Initial deposit X1/LRR. Answer the following questions: (1) What are the components of money supply? Ans: Currency and coins held with public, Net demand deposits of commercial banks and other deposits of RBI. (2) How does LRR influence the process of credit creation? Ans: There is an inverse relation between LRR and credit creation. Higher the LRR, Lower will be the credit creation and lower the LRR, Higher will be the credit creation. (3) Calculate the LRR if the initial deposit of Rs 10,000 crore lead to a creation of total deposits of Rs 100,000 crore? Ans: Total deposit creation = Initial deposits x 1/LRR 100,000=10,000 X 1/LRR 1/LRR=100,000/10,000 1/LRR=10 LRR=1/10 LRR=0.1=10% Q.9 Read the following news report and answer Questions on the basis of the same: The Reserve Bank of India (RBI), in its fourth bi-monthly monetary meet held on October 9,2020, has decided to keep the repo rate unchanged yet again with accommodative stance. This is the second time in a row the apex bank has kept the key rates unchanged.

The repo rate and reverse rate remain at 4 per cent and 3.35 per cent, respectively, after the announcement. RBI keeping the repo rate unchanged in this monetary policy review was expected by many market participants due to the rising inflation and growth uncertainty in the country. Borrowers who are facing salary cut/job loss due to the novel coronavirus pandemic situation and were looking for some reduction in their equated monthly instalment (EMI) burden will have to wait a little longer. On the other hand, no change in policy rates means good news for fixed deposit (FDs) investors as banks may go slow on cutting interest rates on FDs. 1. What is repo rate? Ans. The rate at which the RBI offers short period loans to the commercial banks by buying the government securities in the open market. 2. Why were the borrowers looking for reduction in EMI? Ans. To tackle COVID-19-induced distress. 3.How does the repo rate effect EMI? Ans. An increase in repo rate results in increasing the interest rate on loans for customers as well as EMI and vice a versa. 4. Changes in repo rate is a part of Fiscal policy. (True/False) Ans. False, it is a part of monetary policy. Q.10 Commercial banks demand deposits are a part of money supply. Commercial banks lend money to the borrowers by opening demand deposit account in their names. The borrowers are free to use this money by writing cheques. According to definition demand deposits are a part of money supply. Therefore, by creating additional demand deposits bank create money. Money creation depends on two factors: Primary deposits and legal reserve ratio. Deposit multiplier 1/LRR, Total deposit creation=Initial deposit X1/LRR. Answer the following questions: 1. What are the components of money supply? Ans: Currency and coins held with public, Net demand deposits of commercial banks and other deposits of RBI. 2. How does LRR influence the process of credit creation? Ans: There is an inverse relation between LRR and credit creation. Higher the LRR, Lower will be the credit creation and lower the LRR, Higher will be the credit creation. 3. Calculate the LRR if the initial deposit of Rs 10,000 crore lead to a creation of total deposits of Rs 100,000 crore? Ans: Total deposit creation = Initial deposits x 1/LRR 100,000=10,000 X 1/LRR 1/LRR=100,000/10,000 1/LRR=10 LRR=1/10 LRR=0.1=10% CASE STUDY Q.11 Reserve Bank of India (RBI) is the central bank of the country. RBI is a statutory body. It is responsible for the printing of currency notes and managing the supply of money in the Indian economy. It plays multi-facet role by executing multiple functions such as overseeing monetary policy, issuing currency, managing foreign exchange, working as a bank of government and as banker

of scheduled commercial banks, among others. It also works for overall economic growth of the country. Q1. Define a central bank. 1 Q2. Who issues the one-rupee notes and coins in the country? 1 Q3. RBI acts as the banker to the central government and commercial banks act as banker 1 to the state governments. (T/F) Q4. When commercial banks fail to meet their financial requirements from other sources, 1 the central bank provides them funds through discounting of approved securities and due to this central bank is said to be the _________________. 1 Q5. Where is headquarter of RBI? 1 Answers: 1. Central bank is an apex body that controls, operates, regulates and directs the entire banking and monetary structure of the country. 2. Ministry of Finance. 3. False 4 lender of last resort 5. Mumbai Q.12 Just as individuals need a bank to carry out their financial transactions effectively and efficiently. Government also need a bank to carry out their financial transactions. The RBI serves this purpose for the Government of India (GoI). As a banker to the Government of India, the RBI maintains its accounts, receive payments into and make payments out of these accounts. The RBI also helps the GoI to raise money from the public via issuing bonds and government- approved securities. With the increasing integration of the Indian economy with the global economy arising from greater trade and capital flows, the foreign exchange market has evolved as a key segment of the Indian financial market and the RBI has an important role to play in regulating and managing this segment. The RBI manages forex and gold reserves of the nation. Reserve Bank of India also works as a central bank where commercial banks are account holders and can deposit money. RBI maintains banking accounts of all scheduled banks. Commercial banks create credit. It is the duty of the RBI to control the credit in the economy. Q1. By helping Government of India to raise money through issuing bonds, RBI acts as an ________ for government. Q2. RBI regulates foreign exchange rate through _________ . Q3. Mention any two tools used by RBI to control credit. Q4. Commercial banks recieve ______ rate on the surplus money parked with RBI. ANSWERS: 1. Agent 2. Managed floating 3. CRR, SLR 4. Reverse Repo Q.13 Read the following paragraph carefully and answer the questions on the basis of the same:— Demand deposits are an important constituent of money supply and the expansion of demand deposits means the expansion of money supply. The entire structure of banking is based on credit. Credit basically means getting the purchasing power now and promising to pay at some time in the future. Bank credit means bank loans and advances.A bank keeps a certain part of its deposits as a minimum reserve to meet the demands of its depositors and lends out the remaining to earn

income. The loan is credited to the account of the borrower. Every bank loan creates an equivalent deposit in the bank. Therefore, credit creation means expansion of bank deposits. Q.1 Money multiplier and CRR are _________ (directly/indirectly) related to each other. Q 2. Demand Deposits with commercial banks are a part of money supply.(True/False) Q3 To control excess supply of money in economy,RBI will________ the bank rate. i. Lower ii. Raise iii. Both i and ii iv. None of these Q4 How to calculate money multiplier? Answers:— 1. Indirectly 2. True 3. Raise 4. K= 1/CRR Q.14 Read the following extract and answer the questions given below The past six months of COVID-19 has seen the Reserve Bank of India adopt various measures to deal with the public health emergency. RBI believes that reducing interest rates and supplying liquidity to the banks will reduce the economic consequences of COVID -19. The actions of the apex bank are intended to encourage borrowings by banks in order to support more borrowings by households, small and large corporate businesses. These actions, along with other important functions the apex institution performs for the Union Govt in times like this, are commendable. The public health emergency on account of Covid19 is a crisis, which has resulted in large income loss on account of slowdown of economic activity. This demands timely and decisive government viz. direct and indirect fiscal intervention by the government. Q1. The apex institution of Indian monetary system is _______________ Q2. Reduction in interest rates leads to _________________________of money in the economy (release / restriction) Q3. Which of the following is not a function of the apex institution? a. Issue of currency b. Providing banking facilities to the public c. Controller of credit d. All the above Q4. State true or false Encouraging borrowing by households and businesses will adversely affect the economy as the deposits with the commercial banks will reduce interest rate. Answers: 1. RBI 2. release 3. b 4. false

CASE STUDY BASED QUESTION Q15. India has witnessed various monetary standards in its monetary history. The present monetary system in India is managed and controlled by RBI. In India rupee has been regarded as the standard currency and all transactions are made in terms of rupee. In India the monetary authority is Reserve Bank of India. India follows the paper currency standards as currency followed in India is made up of paper. Coins are limited legal tender money and can be used for making small payments whereas paper notes are unlimited legal tender and can be used for making payments of any amount. India follows the minimum reserve system for note issue. Under this system central bank is required to keep a minimum reserve of gold and foreign exchange worth rupees 200 crores and on this basis RBI can issue any number of notes. Q1 ________ is the main source of money supply in an economy. (a) Central Bank (b) Commercial banks (c) Both a and b (d) Government Q2 What is a legal tender? Q3 When was RBI established? Q4 The one rupee note and coins are issued by (a) Central Bank (b) Commercial Bank (c) Central Government (d) Ministry of Finance Ans1 option c Ans 2 Legal tender money refers to money which can be legally used to make payment of debt or other obligations Ans 3 RBI was established in April 1 1935. Ans4 Option d Q.16 The Indian government had 5.73 billion rupees ($76.16 million) outstanding loans with the central bank under ways and means advances in the week ended July 3, according to the Reserve Bank of India's weekly statistical supplement released on Friday. . Source: ET 14 July,2020 Answer the following questions based on the above news (1*4= 4M) A. RBI acts as _-----------to the government. B. The Central bank also provides___________- facility to commercial bank. C. Central bank of a country has monopoly of_____________. D. The central bank needs to----------- to cope with situation of inflation or deflation. Answers: A. Banker B. Clearing house C. issuing notes D. control money supply Q.17 Read the following and answer the questions on the basis if same: People hold money for three motives transactory, precautionary and speculative motives. The suppy of money includes on the users of money and not the producers of money. Money is an

income when we receive it and becomes expenditure when we pay it. Money plays many functions . Money removes the drawbacks of barter system. Money creation is done by commercial bank but the controller of money supply is central bank. Q. No. : 1 money multiplier is the reciprocal of legal reserve ratio. (True/false) Q. No. 2: money supply doesn‘t includes the money held by: A) public B) RBI C) Government D) both b and c Q. No. 3: central bank ______credit. A) creates B) controls C) restricts D) D) none of the above Q no 4: credit creation means creation of A) primary deposits B) secondary deposit C) time deposit D) none of these Answers Q. No. 1: True Q. No. 2: D Q. No. 3 B Q. No. 4 B Q.19 The Reserve Bank of India (RBI) has increased the repo rate by 25 basis points. This is the first time the repo rate was increased after the current government took charge. RBI governor, Urjit Patel held a meet for 3 days with a 6-member Monetary Policy Committee before the rate hike was announced. The increase in repo rate was primarily due to factors that pressurised India‘s Consumer Price Index (CPI). The hike in repo rate will have a definitive impact on the interest rates offered by banks on loans. The primary effect this will have on the borrower is an increase in his/her vehicle/home/personal loan EMIs. The repo rate is currently 6.25%, as opposed to the previous 6%. The reverse repo rate under the Liquidity Adjustment Facility (LAF) is 6%. The Marginal Standing Facility (MSF) rate and Bank rate is 6.50% as well. 7 June 2018 1. What is Repo rate ? 2. A hike in the repo rate will induce the commercial banks to ________________(increase/decrease) the lending rates. 3. Mention the difference between bank rate and repo rate. 4. The RBI is empowered to regulate the money supply in the economy through its ________________. Answers: 1. Repo rate is the rate at which the central bank of a country lends money to commercial banks to meet their short-term needs. 2. Increase 3. Repo rate is short-term lending by central bank to commercial banks and is governed by short-term interest rate and bank rate is long term lending by the central bank and is governed by the long-term interest rate. 4. Monetary Policy Q.20 The rate of growth of reserve money comprising currency in circulation and Deposits with RBI (bankers and others) decelerated from an average of 17.6% in Q1 of 2011-12 to 4.3% in Q3 of 2012-13. Almost the entire increase in the Reserve money of ` 2381 billion between Q3 of 2011-12 and Q3 of 2012-13consisted of increase in currency in circulation. As sources of reserve money, net RBI credit to Government and increase in net financial assets of RBI contributed to the growth of base money. The rate of growth of base money was muted largely because of an increase in non-monetary liabilities of RBI which increased from ` 1572 billion in

2011-12 to ` 3596 billion between Q3 of the current year to Q3 of 2011-12. Though net foreign exchange assets constituted more than 100% of the base money, rate of growth of acquisition of NFA has moderated considerably, and was 1.6% in Q3 of 2012-13. Increase in net monetary liabilities of RBI was particularly sharp in 2011-12 and first 2 quarters of the current year. Currency constituted nearly 3/4th of the base money. The rate of growth of broad money (M3) was not only lower than the indicative growth set by the Reserve Bank of India but also it witnessed continuous and sequential deceleration in the last 7 quarters. Overall M3 growth moderated to 11.2% in December, 2012. Aggregate deposits with the banks were the major component of broad money counting for over 85% of total M3 and this share has almost remained stable. The sources of broad money are net bank credit to the Government and to the commercial sector. Source: Economic Survey 2012-13, p. 100-101. Some sample questions for discussion based on the given case 1. Explain the components of reserve money. 2. Enumerate the reasons for increase in reserve money between Q3 of 2011-12 and Q3 of 2012-13. 3. What have been the sources of growth of base money during the period? 4. Explain two sources of broad money. 1. During the covid, the apex bank took all possible steps to infuse liquidity in the already distressed economy. During the pandemic, it has come up with various measures to fight the battle. The RBI ,which has ensured there is enough liquidity, has resorted to long term operations which provides one to three year lending to banks at current repo rate and even accepting government securities. Which of the following is not the function of central bank? ( choose the correct alternative) a. Banking facilities to the government. b. Banking facilities to the public c. Lending to government d. Lending to commercial banks Ans….b Q.21 Painting a gloomy picture of the economy, the Reserve Bank of India on Friday said the impact of COVID 19 is more severe than anticipated and the GDP growth during 2020-21 is likely to remain in the negative territory. The outlook of inflation also remains ‗highly uncertain‘, RBI governor Shaktikanta Das said while announcing a 40-basis point in the repo rate as part of the monetary measures to deal with the current crisis. Even if the economic activities are restored in a phased manner, the combination of fiscal, monetary and administrative measures being currently undertaken would create conditions for a gradual revival in activity only in the second half of 2020-21, he added. (MAY22,2020---The Economic Times) A) A monetary policy measure to combat deflationary gap is----- a. Increase in tax rates. b. In crease in government expenditure. c. Increase in price level d. Decrease in interest rate Ans…d B) What will be the effect of a cut in the repo rate on the money supply? a. Money supply will decrease. b. Money supply will be the same. c. Money supply will increase. d. Money supply will decrease initially and then increase. Ans…C

C) Which of the following is not a quantitative method of credit control? a. Open market operations b. Margin requirements c. Variable reserve ratio d. Bank rate policy Ans…b ------------------------------------------------------------------------ Q. 22 Read the following news report and answer questions on the basis of the same: HDFC Bank outages: RBI tells bank to stop sourcing new credit card customers Updated: 03 Dec 2020, 11:06 AM IST MUMBAI: In a big blow to HDFC Bank, the Reserve Bank of India (RBI) has asked the private lender to temporarily stop all launches of its digital business generating activities under ―Digital 2.0\" programme. This includes sourcing of new credit card customers. The regulator issued an order on 2 December with regard to certain incidents of outages in HDFC Bank's internet banking, mobile banking and payment utilities over the past 2 years, the lender said in a regulatory filing on Thursday. This also includes recent outages in the bank‘s internet banking and payment system on 21 November due to a power failure in the primary data centre, the bank said. ―In addition, the order states that the bank‘s board examines the lapses and fixes accountability,\" it said, adding that the restrictions shall be considered for lifting based on satisfactory compliance with the major critical observations as identified by RBI. 1. Which bank controls the banking and monetary structure of India? (a) Reserve Bank of India (b) State Bank of India (c) World Bank (d) Axis Bank 2. Which of these is not a function of central bank? (a) Accepting deposits of general public (b) Custodian of Foreign Exchange Reserve (c) Banker‘s bank (d) Currency Authority 3. Which function of Central bank is highlighted in the above extract? 4. Credit card is a form of money. State True or False giving reason. Answers: 1 Reserve Bank of India 2 Accepting deposits of general public 3 Banker's Bank and Supervisor 4 False.Credit card is not a form of money rather it Is a kind of loan by the issuing bank to the holder of the credit card, whereas debit card represents money. Q.23 In the heart of Mumbai‘s business district is a rare glimpse of India‘s cultural and financial history. Reserve Bank of India‘s monetary museum, which traces the evolution of money in India through its coinage and financial instruments. Here, at Pherozeshah Mehta road in the country‘s commercial capital, you will find glimpses of India‘s smallest coins and its largest, ranging from 0.22 cm diameter ‗panams‘ dating to the 11th century, to the 11.6 kg, Gold Mohur with its 21cm diameter, issued as a gift for royalty by the Moghul emperor Jahangir in the 17th century. India has been one of the earliest issuers of coins in the world and this Monetary Museum takes you through the fascinating journey of how traditional instruments of barter- arrowheads, knives, swords, among them- gave way to coins in different shapes and sizes, documenting political and economic changes over time. From the silver punch-marked coins issued around the 6th century BC to the early indigenous series of Mathur, Ayodhaya and Taxila times, the Cholas and Pandyas and the gold coins of the Guptas from the 4th to 6th century A.D. there is all this and much more at the Museum.

Walk through the different sections explaining the concepts, curiosities and the idea of money, representative Indian coinage from ancient times to the present; the section the section on Promissory Notes, Bank Notes and Hundis… Marvel at the bracelet-shaped money of 16th century South-East -Asia; the BhojaPatra bark of Himalaya birch that were used for promissory notes in ancient times; the early bank notes in ancient times; the early bank notes of India in denominations we cannot begin to imagine today…. There is even contemporary display of what you can do with recycled and shredded currency notes that are of no use otherwise converted into briefcases and trays. 1. What was the form of money used immediately after barter system? 2. Evolution of money has ……… (expanded / contracted) the size of market. 3. Which of the following is not a component of quantitative instrument of RBI? (i) Marginal requirement (ii) Cash Reserve Ratio (iii) Repo Rate (iv) Bank Rate 4. How the domestic money supply will change if there is increase in foreign investment? Answers: 1. Commodity money 2. Expanded 3. Marginal Requirement 4. Remain constant Q.24. Case Study Based Question: Analyze the following picture carefully and answer the questions on the basis of the same:

i) Commercial Bank creates money by way of a) Time Deposits b) Demand Deposits c) Treasury Bills d) Bill of Exchange ANSWER (b) Demand Deposits Ii) Higher CRR implies higher capacity to create credit. True/False ANSWER- False- Higher CRR means lower capacity to crete credit iii) What is the other name of Initial Deposits? ANSWER- Primary Deposits iv) The function mentioned in the picture is performed by Central/Commercial Bank. Answer- Commercial Bank Q.25 Money supply has two components: Currency and Demand Deposits. Currency is issued by the Central Bank whereas demand deposits are created by the commercial banks. They create money in the form of demand deposit related to the loans offered by them. Demand deposits of the commercial banks are many times more than their cash reserves. This is based on the historical experience of the banks that cash withdrawals of funds is only a small percentage of the total demand deposits. The money created by the commercial banks in the form of demand deposits is mainly used for investment or production purposes. Any rise in investment leads to many times more increase in the national income of an economy. Q1. Currency is issued by the central bank, yet we say the commercial banks create money. How? Q2. Producers of money supply are Central Bank, Government of India and ...................................... . Q3. Commercial banks contribute to the supply of money by way of ......................... . ( loans in cash / loans in demand deposits) Q4. Commercial banks create money by way of : a. Time deposits b. Demand deposits c. Treasury bills d. Bill of exchange ANSWERS: A1. Yes, the given statement is correct. The central bank is the sole authority of issuing notes in the country. However by advancing loans through credit creation, commercial banks contribute to money supply in the economy. A2. Commercial banks A3. Loans in demand deposits A4. Demand deposits Q.26 Credit control is the most crucial function played by any Central Bank in the modern times. The primary Objective of credit control is to remove causes responsible for instability in price fluctuations which in turn are related to the supply of money. By controlling credit, the Central Bank can exercise an effective control over economic activity and mobilize it in the

desired direction. in India, The RBI controls the money supply in the economy in various ways. The tools used by the Central bank to control money supply can be quantitative or qualitative. Quantitative tools control the extent of money supply by changing the Cash Reserve Ratio (CRR) or Statutory Liquidity Ratio (SLR) or Bank Rate or Repo Rate or Reverse Repo Rate, or through Open market operations (OMO). Qualitative tools include persuasion by the Central Bank in order to make commercial banks discourage or encourage lending which is done through margin requirement, moral suasion, etc. Q1. The policy adopted by Central bank of a country in the direction of credit control or money supply is known as --------.(Monetary Policy/ Fiscal Policy) Q2. Quantitative instrument of monetary policy included: a. Margin Requirement b. Bank Rate c. Statutory Liquidity Ratio d. Both (b) and (c) Q3. Why are quantitative methods of credit control called quantitative? Q4. Give one instrument used by the central bank to control the credit. Q.27 India money supply surge signals pandemic-related uncertainty, not growth Heightened uncertainty in India caused by the coronavirus pandemic has led to a surge in currency in circulation as people hoard cash or park money in accessible deposits to safeguard themselves against salary cuts or job losses. According to RBI data, India's M3 money supply rose 6.7% in the first five months of this year compared with the same period last year, the highest growth in seven years. Currency in circulation, which measures money with the public and in banks has also surged. A rise in money supply usually is seen as a leading indicator of growth in consumption and business investments, but the rise this time is unlikely to bolster either, analysts said. The Economic Times ,Jun 23, 2020 1. Money supply is a __________(stock/flow) concept. Ans. Stock 2. Choose the correct statement: a) M3 = M2 + Net Time Deposits with Banks b) M3 = M1 + Net Time Deposits with Banks c) M3 = M1 + Savings deposits with Post Office Saving Bank d) M3 = M2 + Savings deposits with Post Office Saving Bank Ans. b) M3 = M1 + Net Time Deposits with Banks 3. Currency in circulation, which measures money with the public and in banks, is known as: a) High Powered Money b) Stock of money held by the government c) Money Supply d) All of these Ans. c) Money Supply 4. Commercial banks create money by way of: a) Demand deposit. b) Time deposit. c) Treasury bill d) Bill of exchange. Ans. a) Demand deposit.

Q.28 In the heart of Mumbai‘s business district is a rare glimpse of India‘s cultural and financial history. Reserve Bank of India‘s monetary museum, which traces the evolution of money in India through its coinage and financial instruments. Here, at Pherozeshah Mehta road in the country‘s commercial capital, you will find glimpses of India‘s smallest coins and its largest, ranging from 0.22 cm diameter ‗panams‘ dating to the 11th century, to the 11.6 kg, Gold Mohur with its 21cm diameter, issued as a gift for royalty by the Moghul emperor Jahangir in the 17th century. India has been one of the earliest issuers of coins in the world and this Monetary Museum takes you through the fascinating journey of how traditional instruments of barter- arrowheads, knives, swords, among them- gave way to coins in different shapes and sizes, documenting political and economic changes over time. From the silver punch-marked coins issued around the 6th century BC to the early indigenous series of Mathur, Ayodhaya and Taxila times, the Cholas and Pandyas and the gold coins of the Guptas from the 4th to 6th century A.D. there is all this and much more at the Museum. Walk through the different sections explaining the concepts, curiosities and the idea of money, representative Indian coinage from ancient times to the present; the section the section on Promissory Notes, Bank Notes and Hundis… Marvel at the bracelet-shaped money of 16thcentury South-East -Asia; the BhojaPatra bark of Himalaya birch that were used for promissory notes in ancient times; the early bank notes in ancient times; the early bank notes of India in denominations we cannot begin to imagine today…. There is even contemporary display of what you can do with recycled and shredded currency notes that are of no use otherwise converted into briefcases and trays. 1. What was the form of money used immediately after barter system? 2. Evolution of money has ……… (expanded / contracted) the size of market. 3. Which of the following is not a component of quantitative instrument of RBI? (i) Marginal requirement (ii) Cash Reserve Ratio (iii) Repo Rate (iv) Bank Rate 4. How the domestic money supply will change if there is increase in foreign investment? Answers: 1. Commodity money 2. Expanded 3. Marginal Requirement 4. Remain constant Q.29 Read the following news report and answer questions on the basis of the same: HDFC Bank outages: RBI tells bank to stop sourcing new credit card customers Updated: 03 Dec 2020, 11:06 AM IST MUMBAI: In a big blow to HDFC Bank, the Reserve Bank of India (RBI) has asked the private lender to temporarily stop all launches of its digital business generating activities under ―Digital 2.0\" programme. This includes sourcing of new credit card customers. The regulator issued an order on 2 December with regard to certain incidents of outages in HDFC Bank's internet banking, mobile banking and payment utilities over the past 2 years, the lender said in a regulatory filing on Thursday. This also includes recent outages in the bank‘s internet banking and payment system on 21 November due to a power failure in the primary data centre, the bank said. ―In addition, the order states that the bank‘s board examines the lapses and fixes accountability,\" it said, adding that the restrictions shall be considered for lifting based on satisfactory compliance with the major critical observations as identified by RBI. 1. Which bank controls the banking and monetary structure of India? (a) Reserve Bank of India (b) State Bank of India (c) World Bank (d) Axis Bank

2. Which of these is not a function of central bank? (a) Accepting deposits of general public (b) Custodian of Foreign Exchange Reserve (c) Banker‘s bank (d) Currency Authority 3. Which function of Central bank is highlighted in the above extract? 4. Credit card is a form of money. State True or False giving reason. Answers: 1 Reserve Bank of India 2 Accepting deposits of general public 3 Banker's Bank and Supervisor 4 False.Credit card is not a form of money rather it Is a kind of loan by the issuing bank to the holder of the credit card, whereas debit card represents money. Q.30 Read the following news report and answer Questions 7--10 on the basis of the same: RBI is the central bank, and banker to the sovereign government of India. Under law, the RBI has multiple functions—managing monetary policy and government debt, regulating banks, issuing and managing currency, and holding India‘s foreign-currency reserves. These functions provide a significant source of revenue, of which the surplus is passed on to its lawful owner annually. For the last few years, there has been much debate about the considerable reserves RBI holds via three primary sources—annual surplus, the gain in value from holding foreign currency reserves and appreciation of gold reserves. 1. If a commercial bank fails to get financial accommodation from anywhere, it approaches (other commercial banks/the central bank )as a last resort (1 Mark) 2. Central bank is an apex bank of the country that: (1 Mark) (a) controls the entire banking system of the country (b) issues currency (c) acts as a banker to the government (d) a l l of these 3. As a banker to the government, it manages accounts of the government. As an agent to the government, it -----------and----securities on behalf of the government. And as an advisor to the government, it frames policies to regulate the money market. (1 Mark) 4. What does central bank hold to ensure stability of exchange rate in the international money market? (1 Mark) Q.31 The RBI controls the money supply in the economy in various ways. The tools used by the Central bank to control money supply can be quantitative or qualitative. Quantitative tools, control the extent of money supply by changing the CRR, or bank rate or open market operations. Qualitative tools include persuasion by the Central bank to make commercial banks discourage or encourage lending, which is done through moral suasion, margin requirement, etc. Q1. The central bank encourages lending in the situation of-----------. (inflation/deflation). Q2. Increasing the legal Reserve Ratios lead to---------- of credit. (expansion/contraction) Q3. Bank rate is the rate of interest RBI cnarges------------. (commercial banks/ public) for lending money Ans. 1.: Deflation 2: Contraction 3: Commercial banks

Q.32 There are two types of open market operations: outright and repo. Outright open market operations are permanent in nature: when the central bank buys these securities, it is without any promise to sell them later. Similarly, when the central bank sells these securities, it is without any promise to buy them later. As a result, the injection/absorption of the money is of permanent nature. However, there is another type of operation in which when the central bank buys the security, this agreement of purchase also has specification about date and price of resale of this security. This type of agreement is called a repurchase agreement or repo. The interest rate at which the money is lent in this way is called the repo rate. Similarly, instead of outright sale of securities the central bank may sell the securities through an agreement which has a specification about the date and price at which it will be repurchased. This type of agreement is called a reverse repurchase agreement or reverse repo. The rate at which the money is withdrawn in this manner is called the reverse repo rate. The Reserve Bank of India conducts repo and reverse repo operations at various maturities: overnight, 7-day, 14- day, etc. This type of operations has now become the main tool of monetary policy of the Reserve Bank of India. Q1. To control the money supply RBI encourages------------(injection/absorption) of the money. Q2. The repo rate is the interest paid on -------------(long term/short term) operations. Q3. Open Market operations is a --------------(Quantitative/Qualitative) tool Ans: 1 absorption 2. short term 3. Quantitative Q.33 Read, the following hypothetical Case Study, carefully and answer the below question on the basis of the same. India money supply surge signals pandemic-related uncertainty, not growth. Heightened uncertainty in India caused by the coronavirus pandemic has led to a surge in currency in circulation as people hoard cash or park money in accessible deposits to safeguard themselves against salary cuts or job losses. According to RBI data, India's M3 money supply rose 6.7% in the first five months of this year compared with the same period last year, the highest growth in seven years.Currency in circulation, which measures money with the public and in banks has also surged. A rise in money supply usually is seen as a leading indicator of growth in consumption and business investments, but the rise this time is unlikely to bolster either, analysts said. \"We suspect that the recent increase reflects higher cash withdrawals by depositors to meet needs during the lockdown period, until normalcy returns,\" said Radhika Rao, an economist at DBS Bank. Source: Economic Times. Q.1. The impact of Covid 19 on India‘s money supply is ____________(certain /uncertain). Q.2. The demand deposits of Commercial Banks is __________________(increasing or decreasing) Q.3. Will there be any increase in India‘s M1 money supply? Give Reason. Q.4. Is this rise in money supply good for economy? Give Reason. Ans: 1.Uncertain 2. Increasing 3. Yes, there is increase in India‘s M1 money supply as people are parking money in banks and with themselves to safeguard themselves. 4. No, as this rise in money supply is for cash withdrawals to meet basic needs and not for business investments.

Q.34 Please note if this paragraph is difficult for students than we can give them next option. Read, the following hypothetical Case Study, carefully and answer the below question on the basis of the same. The total stock of money circulating in an economy is the money supply. The circulating money involves the currency, printed notes, money in the deposit accounts and in the form of other liquid assets. Valuation and analysis of the money supply help the economist and policy makers to frame the policy or to alter the existing policy of increasing or reducing the supply of money. The valuation is important as it ultimately affects the business cycle and thereby affects the economy. Periodically, every country's central bank publishes the money supply data based on the monetary aggregates set by them. In India, the Reserve Bank of India follows M0, M1, M2, M3 and M4 monetary aggregates. Q.1. Money Supply is a _______(stock/flow) concept. Q.2. Valuation and analysis of the money supply done by RBI represents which function of RBI _______________(currency authority/ controller of money supply and credit) Q.3. Give the formula of M1. Q.4. M1 is the most liquid measure of money supply. State true or false. Give reason. Ans: 1. Stock 2. Controller of money supply and credit 3. M1= currency and coins with public+ demand deposits of commercial banks+ other deposits with RBI. 4. True as all its components are easily used as a medium of exchange. Q.35 The rate of growth of reserve money comprising currency in circulation and deposits with RBI (bankers and others) decelerated from an average of 17.6% in Q1 of 2011-12 to 4.3% in Q3 of 2012-13. Almost the entire increase in the reserve money of ` 2381 billion between Q3 of 2011-12 and Q3 of 2012-13 consisted of increase in currency in circulation. As sources of reserve money, net RBI credit to Government and increase in net financial assets of RBI contributed to the growth of base money. The rate of growth of base money was muted largely because of an increase in non-monetary liabilities of RBI which increased from ` 1572 billion in 2011-12 to ` 3596 billion between Q3 of the current year to Q3 of 2011-12. Though net foreign exchange assets constituted more than 100% of the base money, rate of growth of acquisition of NFA has moderated considerably, and was 1.6% in Q3 of 2012-13. Increase in net monetary liabilities of RBI was particularly sharp in 2011-12 and first 2 quarters of the current year. Currency constituted nearly 3/4th of the base money. The rate of growth of broad money (M3) was not only lower than the indicative growth set by the Reserve Bank of India but also it witnessed continuous and sequential deceleration in the last 7 quarters. Overall M3 growth moderated to 11.2% in December, 2012. Aggregate deposits with the banks were the major component of broad money counting for over 85% of total M3 and this share has almost remained stable. The sources of broad money are net bank credit to the Government and to the commercial sector. Source: Economic Survey 2012-13, p. 100-101. 52 Some sample questions for discussion based on the given case 1. Explain the components of reserve money. 2. Enumerate the reasons for increase in reserve money between Q3 of 2011-12 and Q3 of 2012- 13. 3. What have been the sources of growth of base money during the period? 4. Explain two sources of broad money 1. Which one of the following is measurement of term M1 of money supply? a) Term deposit

b) Demand deposit c) Other deposit to commercial banks d) All of the above 2. In the terminology of economics and money, ____________ component of money supply is known as ‗Broad money‘. 3. Demand deposits with commercial banks are a part of money supply (True/False) 4. In monetary terminology, what is called the 'monetary base' or 'high powered money'? a) the total assets of RBI b) the total liability of RBI c) the total debt of the government d) the total foreign exchange of RBI Answers: 1. b) Demand deposit 2. M3 3. True 4. b) the total liability of RBI Q.36 RBI asks banks to retain profit, not make any dividend payment for FY20 In view of the economic shock caused by the COVID-19 pandemic, Reserve Bank of India(RBI) on Friday asked scheduled commercial banks and co-operative banks not to make any dividend for the financial year ended March 2020.In view of the ongoing stress and the heightened uncertainty on account of the pandemic, RBI said it is imperative that banks continue to conserve capital to support the economy and absorb losses if any. The decision is based on review of the September quarter financial performance of banks. In response to the pandemic, RBI has focused on resolution of stress among borrowers, and facilitating credit flow to the economy, , while ensuring financial stability, RBI Governor Shaktikanta Das said. \"In continuation of this effort and to help banks conserve capital, while creating room for fresh lending, it has been decided after a review that commercial and co-operative banks will retain the profits and not make any dividend pay-out from the profits pertaining to financial year 2019-20,' he said. Guidelines on The above measure will be issued shortly. In April, RBI had announced that scheduled commercial banks (SCBs) and cooperative banks shall not make any dividend pay-outs from profits pertaining to the financial year ended March 31, 2020, until further instructions, which shall be reassessed based on financial results of banks for the quarter ending September 30, 2020. Read the above content and answer the following questions:- Q1. __________create money supply in an economy and _____regulates it. Ans: Commercial banks, Central bank Q2. The purpose of not paying dividends by commercial and cooperative banks is to retain funds with them. RBI guided them to do so in order to _____________ credit creation capacity of banks. (Increase, decrease) Ans : increase Q3. Mention any two other tools of RBI to control credit supply in the economy. A. Repo rate B. Open market operations C. Reserve ratios

Q.37 Read, the following hypothetical Case Study, carefully and answer the below (4) question on the basis of the same. 1 mark for each THE SUPPLY OF MONEY : VARIOUS MEASURES question. In a modern economy money consists mainly of currency notes and coins issued by the monetary authority of the country. In India currency notes are issued by the Reserve Bank of India (RBI), which is the monetary authority in India. However, coins are issued by the Government of India. Apart from currency notes and coins, the balance in savings, or current account deposits, held by the public in commercial banks is also considered money since Cheques drawn on these accounts are used to settle transactions. Such deposits are called demand deposits as they are payable by the bank on demand from the account-holder. Other deposits, e.g. fixed deposits, have a fixed period to maturity and are referred to as time deposits. Though a hundred-rupee note can be used to obtain commodities worth Rs 100 from a shop, the value of the paper itself is negligible – certainly less than Rs 100. Similarly, the value of the metal in a five-rupee coin is probably not worth Rs 5. Why then do people accept such notes and coins in exchange of goods which are apparently more valuable than these? The value of the currency notes and coins is derived from the guarantee provided by the issuing authority of these items. Every currency note bears on its face a promise from the Governor of RBI that if someone produces the note to RBI, or any other commercial bank, RBI will be responsible for giving the person purchasing power equal to the value printed on the note. The same is also true of coins. Currency notes and coins are therefore called fiat money. They do not have intrinsic value like a gold or silver coin. They are also called legal tenders as they cannot be refused by any citizen of the country for settlement of any kind of transaction. Cheques drawn on savings or current accounts, however, can be refused by anyone as a mode of payment. Hence, demand deposits are not legal tenders. Q1: Why deposits in banks by public are considered money? Q2: What gives the value to the currency notes and coins? Q3: Define fiat money. Q1: Why do we consider currency notes and coins as legal tenders? Ans1: deposits in banks by public are considered money because Cheques drawn on these accounts are used to settle transactions. Ans2: The value of the currency notes and coins is derived from the guarantee provided by the issuing authority of these items. Ans3: Every currency note bears on its face a promise from the Governor of RBI that if someone produces the note to RBI, RBI will be responsible for giving the person purchasing power equal to the value printed on the note. Currency notes and coins are therefore called fiat money. Ans4: They are also called legal tenders as they cannot be refused by any citizen of the country for settlement of any kind of transaction.

Q.38 Answer the following question- The central bank is an apex bank that controls the entire banking system of a country. It is the sole agency of note issuing and controls the supply of money in the economy. It serves as a banker to the government and manages forex (foreign exchange) reserves of the country. Reserve Bank of India (RBI) is the central bank of India. Central bank of a country has the exclusive right (monopoly right) of issuing notes. This is called Currency Authority function of the central bank. The notes issued by the central bank are an unlimited legal tender. 1. Name central bank of India. 2. Explain currency authority function. 3. Which bank in India has authority of issuing currency? 4. How central bank work as a bank for government? ANSWERS 1. Reserve Bank of India (RBI) 2. Central bank of a country has the exclusive right (monopoly right) of issuing notes. This is called Currency Authority function of the central bank 3. Reserve Bank of India (RBI) 4.As a banker to the government, it manages accounts of the government, it buys and sells securities on behalf of the government and. it frames policies to regulate the money market. Q.39 In India, commercial banks have to keep cash reserves with the Reserve Bank which are fixed at a percentage of their demand and time deposits. This is called cash reserve ratio (CRR). In March 2007, this cash reserve ratio was raised to 6.5 per cent. In return they enjoy the privilege of rediscounting their bills with the central bank as well as securing loans against approved securities when in need. The Reserve Bank of India uses the changes in Cash reserve ratio as an instrument of credit control. When the economy faces the problem of inflation (i.e. rising price level) Reserve Bank raises cash reserve ratio to reduce the liquid resources with the banks so that they can issue less credit. On the other hand, when there is recession in the economy, Reserve Bank lowers cash reserve ratio to increase liquidity of the banks so that they can issue more credit for productive purposes. Q1 How does RBI decide the percentage of cash reserves? Ans-RBI sets the percentage of CRR on the basis of demand and time deposits held by commercial banks. Q2 Name one instrument used by RBI to control credit in the country? Ans- LRR which is aggregate of SLR and CRR Q 3 What are the facilities provided by Central Bank to commercial banks? Ans-1.Commercial banks enjoy the privilege of rediscounting their bills with central ban 2. They secure loans against approved securities when in need. Q4 How does RBI increase liquidity of banks using CRR as an instrument? Ans- Reserve Bank lowers cash reserve ratio to increase liquidity of the banks so that they can issue more credit for productive purposes. MONEY & BANKING- Case Study Questions Q.40 Read the following excerpt carefully and answer the questions that follow on your understanding of the same.

Money has solved the problem by working as a medium of exchange. The seller can sell the goods in the market in return for money and buy the goods that he wants in return for money. In a modern economy, money comprises cash and bank deposits. Depending upon what types of bank deposits are being included, there are many measures of money. These are created by a system comprising two types on institutions- the Central bank and the Commercial Banking System. Q1. Which problem has the money solved? Q2. Money has separated the transactions of _____________ & ____________ from each other by acting as a medium of exchange. Q3. India got its central bank in the year______________. It is called the ____________. Q4. State any function performed by the Central Bank Answers: A1. Money has solved the problem of ―Lack of double coincidence of wants‖ of the Barter System. A2. Buying, selling A3. 1935, Reserve Bank of India A4. The student can write about any function. Q.40 Read the following excerpt carefully and answer the questions that follow on your understanding of the same. Indian banking services, apart from basic payment and transfer operations, are likely to come to a halt as lenders impose restrictions on the movement of employees and their interaction with customers to protect them from Covid-19. Although banking is an essential service — key staff will be allowed to attend work during state-imposed curbs — new loans, project appraisals, negotiations for fresh terms for existing loans will have to wait. ―We request all our customers to bear with us as other non-essential services during this period may be suspended,‖ the Indian Banks‘ Association (IBA) said in a note. ―We will continue providing banking services to our valued customers. However, we appeal to everyone to visit branch premises only in case of absolute necessity. Our employees are also facing the same challenges that you are and so we are asking for your help too.‖ The RBI has directed all lenders to make banking facilities available on their respective mobile applications to prevent any disruption in service. Lenders such as HDFC Bank, Kotak Mahindra Bank, Axis Bank, Bank of Baroda and State Bank of India said they have been sending advisories to customers to use mobile banking facilities as much as possible. Q1. What authority does the RBI have in our country? Q2. If, ―new loans, project appraisals, negotiations for fresh terms for existing loans will have to wait‖, what will its impact be on the money supply. Q3. Do you think mobile banking will resolve all the problems? Q4. What do we call the other banks stated in the above paragraph except the RBI? Answers: A1. It is the apex bank or the Central Bank of our country. A2. The money supply will decrease, production, income and further employment will also decrease leading to a further fall in income.

A3. Yes, to a very great extent. A4. Commercial Banks. Q.41 Read the following news report and answer Questions 7--10 on the basis of the same: RBI is the central bank, and banker to the sovereign government of India. Under law, the RBI has multiple functions—managing monetary policy and government debt, regulating banks, issuing and managing currency, and holding India‘s foreign-currency reserves. These functions provide a significant source of revenue, of which the surplus is passed on to its lawful owner annually. For the last few years, there has been much debate about the considerable reserves RBI holds via three primary sources—annual surplus, the gain in value from holding foreign currency reserves and appreciation of gold reserves. 7. If a commercial bank fails to get financial accommodation from anywhere, it approaches (other commercial banks/the central bank )as a last resort (1 Mark) 8. Central bank is an apex bank of the country that: (1 Mark) (a) controls the entire banking system of the country (b) issues currency (c) acts as a banker to the government (d) a l l of these 9. As a banker to the government, it manages accounts of the government. As an agent to the government, it -----------and----securities on behalf of the government. And as an advisor to the government, it frames policies to regulate the money market. (1 Mark) 10. What does central bank hold to ensure stability of exchange rate in the international money market? (1 Mark) Q.42 Case study - money and banking An assessment of aggregate demand during the year so far suggests that the shock to consumption is severe, and it will take quite some time to mend and regain the pre-COVID-19 momentum. The Reserve Bank's survey for the month of July indicates that consumer confidence fell to an all-time low, with a majority of respondents reporting pessimism relating to the general economic situation, employment, inflation and income. Urban consumption demand has suffered a bigger blow - passenger vehicle sales and supply of consumer durables in Q1 of 2020-21 have dropped to a fifth and one- third, respectively, of their level a year ago; air passenger traffic has ground to a halt. Rural demand, by contrast, has fared better, it added. The second straight quarter of contraction pushed India into a technical recession for the first time. The Reserve Bank of India has projected the Indian economy to contract 9.5% in the current fiscal while the International Monetary Fund (IMF) and World Bank estimates contraction at 10.3% and 9.6%, respectively. Q1. what will be the impact of decrease in aggregate demand on currency deposit ratio? Ans currency deposit ratio is the ratio of money held by public in currency(C) to that they hold in the bank account(DD) cdr=C/DD SO it will fall . Q2. To overcome the situation of deficient demand central bank should- (a) Increase CRR (b) Increase Bank rate

(c) purchase of government securities in the open market (d) sale of Government Security in open market. ANSWER ( C) purchase of government securities in the open market Q3 money supply is increased when LRR (a) Falls (b) Rises (c) Both ( a) and (b) (d) None of the above ANSWER (a) Falls Q4 which of the following doesn't come under quantitative method of monetary policy? (a) bank rate (b) CRR (c) SLR (d) margin requirement ANSWER(d) Margin requirement Q5 What is technical recession? ANSWER- A technical recession is when a country faces a back-to-back decline (for two consecutive quarters) in the GDP. Q.43 The rate of growth of reserve money comprising currency in circulation and deposits with RBI (bankers and others) decelerated from an average of 17.6% in Q1 of 2011-12 to 4.3% in Q3 of 2012-13. Almost the entire increase in the reserve money of ` 2381 billion between Q3 of 2011-12 and Q3 of 2012-13 consisted of increase in currency in circulation. As sources of reserve money, net RBI credit to Government and increase in net financial assets of RBI contributed to the growth of base money. The rate of growth of base money was muted largely because of an increase in non-monetary liabilities of RBI which increased from ` 1572 billion in 2011-12 to ` 3596 billion between Q3 of the current year to Q3 of 2011-12. Though net foreign exchange assets constituted more than 100% of the base money, rate of growth of acquisition of NFA has moderated considerably, and was 1.6% in Q3 of 2012-13. Increase in net monetary liabilities of RBI was particularly sharp in 2011-12 and first 2 quarters of the current year. Currency constituted nearly 3/4th of the base money. The rate of growth of broad money (M3) was not only lower than the indicative growth set by the Reserve Bank of India but also it witnessed continuous and sequential deceleration in the last 7 quarters. Overall M3 growth moderated to 11.2% in December, 2012. Aggregate deposits with the banks were the major component of broad money counting for over 85% of total M3 and this share has almost remained stable. The sources of broad money are net bank credit to the Government and to the commercial sector. Source: Economic Survey 2012-13, 1. Explain the components of reserve money. 2. Enumerate the reasons for increase in reserve money between Q3 of 2011-12 and Q3 of 2012- 13. 3. What have been the sources of growth of base money during the period? 4. Explain two sources of broad money. Q.44 Case study based question Read, the following hypothetical Case Study and answer the following question numbers on the base of the same.

While addressing the Banking and Economics Conclave at the State Bank of India, the RBI Governor referred to the reconstruction scheme for YES Bank, in which SBI along with other banks had infused ₹10,000 crore as equity capital, and the public offer which followed. On March 5, the RBI took control of YES Bank Limited in an attempt to avoid the collapse of the bank, which had an excessive amount of bad loans. The bank‘s board was also reconstructed, and its accounts were put under 30 days‘ moratorium. Since 1969, 36 bank mergers have happened on these lines. Customers were allowed to withdraw up to ₹50,000 only from their accounts, except in certain exceptional circumstances (such as to cover medical care, emergencies, higher education, and ―obligatory expenses‖ for ceremonies such as weddings). Moreover, there are some factors which prove that the issues with YES Bank did not occur overnight. Excessive borrowing For any bank to be profitable, it has to be run on depositors‘ money. When a bank receives a deposit, a part of it is invested in government securities under Statutory Liquidity Ratio. Another part is kept as cash or balance with the RBI. At present, an SLR of 18 per cent and CRR of 3 per cent is prescribed. These provisions ensure that all the depositors‘ money is not given away as loan, and that the banks have sufficient funds in the face of any sudden withdrawal by depositors. Banks‘ lending should ideally be within the deposit amount mobilised, minus the SLR and CRR. The ratio of lending against the deposit is called credit deposit ratio. If a bank lends more than its capacity based on deposits, that means it is borrowing in the market by paying a higher rate of interest. For all the banks put together, the credit deposit ratio was at 73.15 per cent, 75.66 per cent, 77.93 per cent and 76.59 per cent as on March 2017, March 2018, March 2019 and March 2020 respectively. But YES Bank had a credit deposit ratio of 92 per cent, 101 per cent, 106 per cent and 162 per cent for the corresponding months. The bank was depending on its outside borrowing to the extent of 14 per cent, 27 per cent, 43 per cent and 66 per cent of its funds requirement during these years. The successful operation of a bank depends on its asset-liability match. When a bank indulges in outside borrowing, it is an indication that the asset-liability mismatch is not under control. 1. Identify the functions of RBI performed in the above case study. Quote the statement. 2. Which bank has infused equity capital of Rs 10,000 in YES bank along with RBI. 3. The ratio of lending against the deposit is called ____________. 4. Is it good or bad If a bank lends more than its capacity based on deposits. State the reason. 5. What kind of provisions ensures that the banks have sufficient funds in the face of any sudden withdrawal by depositors. Q.45 A Banker can render no higher Service to his constituents and to the Public than by teaching them thrift for laying by small savings. The value of a Rupee is never realised through earning it. Its value is

appreciated through a systematic method of Saving a certain part of it – no matter how small that bit is. To promote this object especially amongst individual members of families and enable them to meet unforeseen expenses and household contingencies, we offer our ―Home Saving Safe‖ Account scheme to open ‗Savings Bank Account‘ with us. Interest allowed at 4% per annum on daily Balances. For further particulars, apply to the bank. S.N. POCHKHANAWALA MANAGING DIRECTOR Answer following question after reading the above Statement by one 1 of the founders of Central Bank of India, S.N. POCHKHANAWALA. 1. ―Home saving safe‖ is an investment scheme by Central Bank for 1 people. TRUE/FALSE. 2. If interest rate mentioned in the above paragraph increases from 4% 1 to 5% what effect will it have in an economy a. Decrease in credit creation by banks b. People will save more money in bank c. Demand for loan will increase. d. People will save less money in bank 3. If under ―Home Saving Safe‖ scheme people start depositing money 1 in the bank what will it cause e. Increase in credit creation by the bank f. Increase in CRR g. Decrease in Reserve Ratios. h. Increase in Demand for loan. 4. Saving in the bank lowers the Aggregate demand in the economy. 1 TRUE/FALSE Answer Key Q. No. Answers Marks 1 1. FALSE 1 2. b. People will save more money in bank 3. a. Increase in credit creation by the bank 1 4. TRUE 1 Q.46 Case Study China‘s central bank said Wednesday it will cut the amount of money banks will be required to have on hand from January 6 in an effort to boost the slowing economy. The People‘s Bank of China announced that the reserve requirement ratio for financial institutions would be lowered by 50 basis points. The official Xinhua News Agency said that step will release about 800 billion yuan (USD 114.6 billion) into the economy for lending purposes, delivering a shot in the arm to the economy ahead of the Lunar New Year that falls on January 25.

a. Which ratio is china planning to reduce? b. When the above mentioned ratio decreases , the value of money multiplier ____ c. Reduction in above mentioned ratio will have ______ impact on inflation d. How will reduction in reserve requirement affect money supply in the economy? Ans. a. CRR b. Increases c. Positive d. Reduction in CRR---more cash in hand with commercial banks---- more lending of money to general public----more money supply in economy. Q.47 Case Study The rate of growth of reserve money comprising currency in circulation and deposits with RBI (bankers and others) decelerated from an average of 17.6% in Q1 of 2011-12 to 4.3% in Q3 of 2012-13. Almost the entire increase in the reserve money of ` 2381 billion between Q3 of 2011- 12 and Q3 of 2012-13 consisted of increase in currency in circulation. As sources of reserve money, net RBI credit to Government and increase in net financial assets of RBI contributed to the growth of base money. The rate of growth of base money was muted largely because of an increase in non-monetary liabilities of RBI which increased from ` 1572 billion in 2011-12 to ` 3596 billion between Q3 of the current year to Q3 of 2011-12. Though net foreign exchange assets constituted more than 100% of the base money, rate of growth of acquisition of NFA has moderated considerably, and was 1.6% in Q3 of 2012-13. Increase in net monetary liabilities of RBI was particularly sharp in 2011-12 and first 2 quarters of the current year. Currency constituted nearly 3/4th of the base money. The rate of growth of broad money (M3) was not only lower than the indicative growth set by the Reserve Bank of India but also it witnessed continuous and sequential deceleration in the last 7 quarters. Overall M3 growth moderated to 11.2% in December, 2012. Aggregate deposits with the banks were the major component of broad money counting for over 85% of total M3 and this share has almost remained stable. The sources of broad money are net bank credit to the Government and to the commercial sector. Source: Economic Survey 2012-13, p. 100-101. Answer the following Question: 1. What do you mean by currency in circulation? 2. Why there was increase in reserve money from Q3 of 2011-2012 and Q3 of 2012-2013 3. ‗Currency in Circulation is the component of money supply‘ .State the statement True or False Q.48 Read the following news report and answer the following questions RBI takes steps to revive the beleaguered economy in the face of COVID-19. Liquidity measures Indian‘s central bank RBI, todfay announced a series of measures to help the ailing economy stuck by the financial effects of the ailing novel coronavirus. A number of liquidity measures were announced today which are over and above the Rs 3.74 lakh liquidity boost announced in the last week of March Reverse repo cut Amount under reverse repo window is at Rs 6.9 lakh crore as on April 15. That much of surplus is available with banks to encourage surplus is available with banks to encourage banks to deploy these funds for lending purposes, the RBI reduced reverse repo by 25 bps from 4% to 3.75%. Policy repo rate remain unchanged at 4.4% Q1. What will be effect of decrease in ‗Repo Rate‘ on the money supply?

(a) Money supply will increase (b) Money supply will decrease (c) Money supply will remain same (d) Money supply will initially increase and then it will decrease Ans (a) Q2. Reverse repo rate is the rate which the central bank lends funds to bank. True or false? Ans False Q3. As a member of the advisory committee of RBI, suggest two measures to bring liquidity in the economy. Ans (a) Reduce Reverse repo rate (b) Decrease repo rate Q4. Define repo rate Ans. Repo rate is the rate at which central banks lends money to commercial banks for short run. Q.49 Read the given below passage & answer question 2 to 5. The average growth of money supply in the economy may slip to 9 per cent from 12 per cent in the near term, if 25-30 per cent of unaccounted currency does not flow back into the banking system post demonetisation move. On the basis of the result of the demonetisation that took place in 1978; if 25-30 per cent of unaccounted/undeclared money does not come back in the system that is 3.5 trillion to 4.3 trillion, it will impact growth in money supply by about 3 per cent, the report said. However, noted that in case the RBI decides to print the entire 86 per cent of the high denomination notes, money supply will pick up with the new notes being gradually circulated over a period of time. On the evening of November 8, the government announced that Rs. 500 and Rs. 1,000 notes would no longer be legal tender, as part of its move to eradicate black money or terrorist activities. 2. ______________is/the the main source(s) of money supply in an economy. (Choose the correct alternative) 3. Demonetisation aimed at (Choose the correct alternative) (a) To curb corruption (b) To curb counterfeiting (c) To curb the high denomination notes for illegal activities (d) All of these 4. ___________ is responsible for issuing Rs. 1 currency note in India. 5. Which of the following is not a function of the Central Bank? (Choose the correct alternative) (a) Banking facilities to government (b) Banking facilities to public (c) Lending to government (d) Lending to commercial banks Answer 2. Central bank 3. All of the above 4. Ministry of finance or government of India 5. Banking facilities to public

Q.50 Citing inflation concern, RBI holds key rate; says recovery needs support The Reserve Bank of India (RBI) on Friday left key policy rates unchanged for the third time in a row in the wake of persistently high retail inflation, even as it pointed to the economy, which contracted in the last two quarters, showing signs of an early recovery. The six-member Monetary Policy Committee (MPC) decided to maintain status quo on the policy rate and to continue with the accommodative stance ―as long as necessary, at least during the current financial year and into the next financial year‖ to revive growth on a durable basis, while ensuring that inflation remains within the target range. In its bi-monthly monetary policy, the central bank also offered more funds to 26 stressed sectors in the Covid-hit economy to maintain the tempo of the recovery. On the RBI Internal Working Group‘s recommendation to allow industrial houses to enter the banking sector, RBI Governor Shaktikanta Das said: ―It is a report by an internal working group. It should not be seen as the RBI‘s point of view or decision.‖ Source : Indian Express : 05/12/2020 Answer the following questions 1. Which of the following is not included in policy rates of RBI? a) CRR b) SLR c) Repo Rate d) Margin Requirements Ans. Margin Requirements 2. How does RBI helps to improve the situation of lower credit demand in the economy? a) By selling government securities in the open market b) By increasing repo rate in the economy c) By decreasing reverse repo rate in the economy d) By increasing CRR Ans . c) by decreasing reverse repo rate in the economy 3. Which function of RBI is highlighted in the above case study? (a) Rights of issue (b) Banker to government (c) Banker to banks (d) Credit control Ans (d) 4. Cash reserve ratio is used by RBI to control (a) Credit supply by commercial banks (b) Money supply in the economy (c) Acting as a lender to last resort in the financial sector (d) All of the above Ans (d) All of the above

Q.51 Read, the following hypothetical Case Study, carefully and answer the below question on the basis of the same. In view of the economic shock caused by the COVID-19 pandemic, Reserve Bank of India (RBI) on 01.12.2020, asked scheduled commercial banks and co-operative banks not to make any dividends for the financial year ended March 2020. In view of the ongoing stress and the heightened uncertainty on account of the pandemic, RBI said it is imperative that banks continue to conserve capital to support the economy and absorb losses, if any. The decision is based on review of the September quarter financial performance of the banks. In response to the pandemic, RBI has focused on resolution of stress among borrowers, and facilitating credit flow to the economy, while ensuring financial stability, RBI Governor Shaktikanta Das said. \"In continuation of this effort and to help banks conserve capital, while creating room for fresh lending, it has been decided after a review that commercial and co-operative banks will retain the profits and not make any dividend pay-out from the profits pertaining to financial year 2019-20,\" he said. Source: Economic Times. 1. RBI intends to conserve capital with the banks to facilitate ______________ (credit flow) 2. The pandemic has created an ______________(uncertainty) in the Indian economy. 3. The decision of conserving capital by RBI showcases ________________ function of the central bank. (controller of money supply and credit/ regulator and supervisor of banks) 4. What do you mean by regulator and supervisor of financial system? RBI has authority to regulate and administer the entire banking and financial system Q.52. In modern economy, money comprises cash and Bank deposit. Depending on what type of bank deposits are being included, there are many measures of money these are created by a system comprising two types of Institutions: Central Bank of the economy and the commercial banking system. The total stock of money in circulation among the public at a particular point of time is called money supply. RBI publishes figures of four alternative measures of money supply, viz. M1, M2, M3 and M4. Money supply comprises of currency notes and coinsheld by the public and net demand deposits held by the commercial banks. (I) Money supply is a stock concept. (True or false) (II) What are the components of money supply? (III) What does net demand deposit implies ? (IV) Which institution publish the figures of alternative measures of money? Answers. : (i) true. (ii) currency notes and coins held by the public class net demand deposits held by the commercial banks. (iii) net implies that only deposits of Public Health by the banks are to be included in money supply. The interbank deposits which are commercial bank holes in other commercial banks are not to be regarded as part of money supply. (iv) RBI

Q.53 Read the following hypothetical case study carefully and answer the following questions on the base of the same: RBI Extends Rs 60,000 Crore Credit Line To Yes Bank To tide over liquidity issue, the Reserve Bank of India (RBI) has extended Rs 60,000-crore credit line to Yes Bank so that it meets the obligation of depositors, sources said. This is in line with an assurance given by RBI Governor Shaktikanta Das on Monday saying the regulator was ready to offer liquidity if required after lifting of the moratorium. \"I would like to mention that Yes Bank has enough liquidity to meet any requirement. If there is a requirement, the RBI will provide necessary liquidity support,\" he had said. \"Never in the history of banks (in India) have depositors lost money. The point is, depositors' money is absolutely safe,\" Das also said. As per Section 17 of RBI Act 1934, the central bank can provide liquidity support to any lender in the form of loans and advances against collateral such as stocks, funds and securities (other than immovable property) in which a trustee is authorised to invest trust money by an Act of Parliament. According to the sources, the RBI's assessment found Yes Bank had liquidity issues but no solvency problem or any other issue. The line of credit, however, comes with a caveat -- the first such exercise by the central bank, the sources said. March 2020 Q.1In what capacity RBI has extended a loan to Yes Bank? (1) Ans. As the ‗lender of last resort‘ RBI has extended a loan to Yes Bank. Q.2 Name the function performed by RBI as cited in the above article. (1) Ans. RBI has performed the function of acting as a ―Banker‘s Bank and Supervisor‘. Q.3 As the banker to bank, the central bank functions in three capacities, name them. (1) Ans. As the banker to banks, central bank act as a custodian of cash reserves, lender of the last resort and clearing house. Q.4 State any two other functions performed by central bank. (1) Ans. Banker to the Government, Bank of Issue, Controller of Money Supply (Any two) (Or any other suitable answer) Q.54 Heightened uncertainty in India is caused by the coronavirus pandemic has led to a surge in currency in circulation as people hoard cash or park money in accessible deposits to safeguard themselves against salary cuts or job losses. According to RBI data, India‘s money supply rose 6.7% in the first five months of this year compared with the same period last year, the highest growth in seven years. The currency in circulation, which measures money with the public and in banks has surged. A rise in money supply usually is seen as a leading indicator of growth in consumption and business investments. However, growth in currency notes held by public was much higher than the deposits made in banks. Since the end of March, currency held by the public rose 8.2% compared with a 4.1% increase in term deposits, the data showed. Savings and current account deposits fell 8% due to higher withdrawals. Q.1 __________ (Commercial Banks/Central Bank) is/are the financial institution who accepts deposits from the public and advance loans to others. Q.2 Money supply in India implies___________ (Choose the correct alternative) a) Currency held by the public b) Demand deposits with the banks

c) Both a and b d) Neither a nor b Q.3 In India, Rs 1 currency note is issued by__________ (RBI / Ministry of Finance) Q.4 Which bank in India is the controller of credit? a) Axis Bank b) Reserve Bank of India c) State Bank of India d) Punjab National Bank ANSWERS 1) COMMERCIAL BANK 2) (C) BOTH A AND B 3) MINISTRY OF FINANCE 4) (B) RBI Q.55 Read the following hypothetical Case study, carefully and answer the below question on the basis of the same These days, the development of a country is also judged by its system of transferring finance from the sector where it is in surplus to the sector where it is needed most. To give strength to the economy, SEBI is undertaking measures to develop the capital market. In addition to this there is another market in which unsecured and short-term debt instruments are actively traded everyday. These markets together help the savers and investors in directing the available funds into their most productive investment opportunity. Questions : 1- How is SEBI giving strength to the economy? 2- Name two short term debt instruments. 3- what are the different types of functions performed by SEBI. CASE STUDY SOL. 1- SEBI is providing strength to the economy by the way of undertaking the measures for developing the capital market. 2- Treasury Bills and unsecured debentures 3- Securities and Exchange Board of India (SEBI) is a statutory regulatory body entrusted with the responsibility to regulate the Indian capital markets. It monitors and regulates the securities market and protects the interests of the investors by enforcing certain rules and regulations Q56 Read, the following hypothetical Case Study, carefully and answer the following questions on the base of the same. Money creation is one of the most important activities of commercial bank through the process of money creation, commercial banks are able to create credit which is in far excess of the initial deposits. Commercial banks use deposits for giving loans. However, banks cannot use the whole of the deposit for lending. It is legally compulsory for the banks to keep a certain minimum fraction of their deposits as reserves. The fraction is fixed by the central bank. Banks do not keep hundred percent of reserves against the deposit. They keep reserves only to the extent indicated by the central bank. i) The fraction which the commercial banks keep from their deposits is called___________. ii) Who decides the amount of fraction to be kept? iii) With the help of _____________commercial bank increases the amount far excess of initial deposits. iv) Calculate the total deposit if initial deposit is of Rs.500 crore and LRR is 10%. Answers: (i) LRR (ii)Central Bank (iii)Legal Money Multiplier (iv) Rs5000crore

Q.57 RBI Governor, Shashikanta Das announced a status quo on the interest rate, forecast a lower GDP and sharply raised inflation projections. The members of the MPC agreed to keep key lending rate or the repo rate at 4%& reverse repo rate at 3.35% Banks have said that interest rates will not go down for borrowers as deposits growth has slowed down and credit growth is slowly returning.------- The Economic Times, Dec 5,2020 Answer the following: 1.Which of the two ,monetary or fiscal policy is announced by the Reserve Bank ? 2What does the RBI expect by keeping the same repo rate? 3What is reverse repo rate? 4.Is there a relation between inflation and slow growth in deposits ?clarify. ANSWERS : 1.Monetary policy 2.By maintaining the same repo rate the RBI expects to make borrowings cheaper for the public.(commercial banks will not increase lending rates) 3.The rate of interest paid by the central bank to the commercial banks for keeping their surplus funds with it. 4. With inflation savings decreases. 1 Q.58 The reserve Bank of India will conduct simultaneous purchase and sale of government securities under the open market operation (OMO) for rupees 10000 crore each on September 10 the central bank said on Monday. The RBI on August 31 had announced that it would conduct special simultaneous purchase and sale of government securities under OMO for an aggregate amount of rupees 20,000 crore into tranches of rupees 10,000 crore each as part of its measure to foster orderly market conditions. The first auction is scheduled for September 10, 2020 RBI said. It would be selling 3 securities totaling rupees 10,000 crore and also purchasing equal number of securities of the same amount. a) Define OMO. 1 Ans. Open market operations refers to buying and selling of government securities by the central bank from to the public and commercial banks b) To whom did central bank buys & sells securities from? Ans. To the public or banks c) What will be the effect of purchase & sale of govt.securities? Ans. Sale-decrease money supply ,purchase –increase money supply d) Write name of the governor before shaktikanta Das. Ans. Urjit Patel Q.59 The Foreign-exchange reserves of India became the fifth largest on 5th June 2020 after the Reserve Bank of India released its weekly bulletin. On 20th November 2020 reserves exceeded $575.2 billion for the first time and they became the sixth country after Switzerland to do so. During the 1991 Indian economic crisis country only had $5 billion of reserves left which led to subsequent economic liberalisation. Since then the reserves had seen a 10,000% increase in under 30 years.

1. In India Reserve Bank is the principal supply of money supply. RBI issues currency on the basis of the minimum reserve system. Under this system Reserve Bank maintains a minimum Reserve of _________ in the form of gold and foreign securities. a. 60 crores b. 100 crores c. 200 crores d. 300 crores Answer: Option C – 200 cr. 2. Reserve Bank of India also exercises ___________ to ensure stability of exchange rate in international money market. (managed floating/fixed exchange method/flexible exchange method) Answer: managed floating Q.60 The downfall of Lakshmi Vilas Bank (LVB) was in the making for over a year, and it’s only the most recent of Indian banks to fail in the last 30 months. Over the last two years, India has seen other legacy names like IL&FS, DHFL, Yes Bank and PMC Bank go under. The legacy 93- year old financial institution was placed under moratorium by the Reserve Bank of India (RBI) on Tuesday, November 17; and it will be merged with DBS Bank India in the coming days. While many have lauded the RBI’s quick turnaround, there are others who question why the RBI didn’t step in even sooner or why other banks weren’t considered for a merger. 3. Which Central Bank function has been considered here? Explain it. Answer: Central Bank is known as Lender of last resort because, Banks are supposed to meet their shortfalls of cash from other resources and of the other sources don't meet the demand, then they approach Central Bank. 4. Coins in India are _______ legal tender where as paper notes in India are ______legal tender. Place the appropriate word in the blank (limited/unlimited/valid/invalid) Answer: Coins in India are limited legal tender where as paper notes in India are unlimited legal tender.

Q.61 Refer the following passage and answer Questions 1-4 on the basis of the same: Once there was a goldsmith named Lala in a village. In this village, people used gold and other precious metals in order to buy goods and services. In other words, these metals were acting as money. People in the village started keeping their gold with Lala for safe-keeping. In return for keeping their gold, Lala issued paper receipts to people of the village and charged a small fee from them. Slowly, over time, the paper receipts issued by Lala began to circulate as money. This means that instead of giving gold for purchasing wheat, someone would pay for wheat or shoes or any other good by giving the paper receipts issued by Lala. Thus, the paper receipts started acting as money since everyone in the village accepted these as a medium of exchange. Now, let us suppose that Lala had 100 Kgs of gold, deposited by different people and he had issued receipts corresponding to 100 kgs of gold. At this time Ramu comes to Lala and asks for a loan of 25 kgs of gold. Can Lala give the loan? The 100 kgs of gold with him already has claimants. However, Lala could decide that everyone with gold deposits will not come to withdraw their deposits at the same time and so he may as well give the loan to Ramu and charge him for it. If Lala gives the loan of 25 kgs of gold, Ramu could also pay Ali with these 25 kgs of gold and Ali could keep the 25 kgs of gold with Lala in return for a paper receipt. In effect, the paper receipts, acting as money, would have risen to 125 kgs now. 1. What works precisely the way Lala behaves? 1 modern banking system ; process of deposit and loan (credit) creation by banks 2. The process of _____ and __________ by banks is explained above. 1 deposit and loan (credit) creation 3. Paper receipts started acting as __________ which was accepted as medium of 1 exchange. money 4. ________ mediate between individuals or firms with excess funds and lend to those 1 who need funds. Commercial banks Q.62 RBI is the apex body in Indian Banking System. RBI acts as a supervisor for all other commercial bank. RBI also advises government about the policy to be adopted for the nation. In the recent month after lockdown due to Covid 19, RBI has reduced Bank rate and Repo Rate. When unlock started, banking services recorded growth and the banks are willing to provide more loans to the customer on low interest rate. Due to low interest rate many people started borrowing, money and started purchasing so many assets as well as fir investment too. Answer the following questions: 1. RBI is the ___________ in Indian Banking System. 2. RBI reduce bank rate and Repo rate to provide cheaper credit. (True/False) 3. When rate of u=interest is low then: (a) More loans demanded (b) Less loans demanded (c) No change in Loan (d) None of these 4. Which institution acts as the supervisor of bank?

Q..63 In a village, there are four people, each producing one commodity of rice, pulses, shoes and books. The rice producer finds it difficult to remember how many bags of rice are required to exchange for 3 books. He also finds that over time his rice gets eaten by pests. One day the producers get together and decide to simplify the exchange, they will accept shells in return for their goods. (a) Identify the two problems discussed in the above case. (b) How does the problems to be solved? Ans:- (a) Lack of common unit of value and the difficulty in wealth storage. (b) This problem is solved by using money as a medium of exchange because: Money act a yardstick of value to which all goods and services can be compared. Money as a Store Value helps in wealth creation. Q.64 To force the rate of interest in the economy to come down, the RBI on Thursday said it would buy government securities ( G-secs) of 10-year tenure and at the same time sell government bonds of up to one- year tenure, bosworth Rs 10,000 crore each. Globally known as ' operation twist', this is the second such operation by the central bank in as many weeks slotted for December 30. With the benchmark yield on the 10-year G-secs at an elevated level for a quite some time, despite a series of rate cuts by the RBI , economists were expecting this special manoeuvre in India could help transmission of rates in the economy. Read the following paragraph and answer the following questions : a) Which function of Central bank is highlighted in this paragraph and explain it briefly? Choose the correct alternative from the following. Q.65 The rate of growth of reserve money comprising currency in circulation and Deposits with RBI (bankers and others) decelerated from an average of 17.6% in Q1 of 2011-12 to 4.3% in Q3 of 2012-13. Almost the entire increase in the Reserve money of ` 2381 billion between Q3 of 2011-12 and Q3 of 2012-13 consisted of increase in currency in circulation. As sources of reserve money, net RBI credit to Government and increase in net financial assets of RBI contributed to the growth of base money. The rate of growth of base money was muted largely because of an increase in non-monetary liabilities of RBI which increased from ` 1572 billion in 2011-12 to ` 3596 billion between Q3 of the current year to Q3 of 2011-12. Though net foreign exchange assets constituted more than 100% of the base money, rate of growth of acquisition of NFA has moderated considerably, and was 1.6% in Q3 of 2012-13. Increase in net monetary liabilities of RBI was particularly sharp in 2011-12 and first 2 quarters of the current year. Currency constituted nearly 3/4th of the base money. The rate of growth of broad money (M3) was not only lower than the indicative growth set by the Reserve Bank of India but also it witnessed continuous and sequential deceleration in the last 7 quarters. Overall M3 growth moderated to 11.2% in December, 2012. Aggregate deposits with the banks were the major component of broad money counting for over 85% of total M3 and this share has almost remained stable. The sources of broad money are net bank credit to the Government and to the commercial sector. Source: Economic Survey 2012-13, p. 100-101. Some sample questions for discussion based on the given case 1. Explain the components of reserve money. ANS. Currency in circulation and

Deposits with RBI (bankers and others) 2. What have been the sources of growth of base money during the period? Ans. Net RBI credit to Government Increase in net financial assets of RBI 3.Explain two sources of broad money. Ans. Net bank credit to the Government Net bank credit to the commercial sector. Q.66 When a bank is in trouble and needs money, and nobody will lend to it, the central bank may intervene and lend, frequently with conditions and strings attached. This system is there to prevent a country‘s financial system from collapsing. The role of the central bank makes the creation of credit easier by boosting confidence in the banking system and reducing the risk of a bank run. A bank run is when customers panic and crowds start withdrawing their money. For example, Reserve Bank had opened an emergency line of credit of around Rs 60,000 crore to Yes Bank to meet any liquidity crisis in paying back its depositors It can be noted that governor Shaktikanta Das had on March 16 reiterated that he would not allow Yes Bank and make depositors lose their hard earned money. According to the terms of the restructuring arrangement prepared by the RBI and government, Yes Bank would have to exhaust all its immediate liquid assets before accessing this fund. Q: 1 Define Central Bank. Q: 2 Identify the function of central bank in above description and explain it. Q: 3 What is the benefit of this function. Ans1: Central Bank is an 'Apex' body that controls, operates, regulates and directs the entire banking and monetary structure of the country. It is known as the apex (supreme) body as it occupies the top most position in the monetary and banking system of the country. Ans:2 As Lender of the Last Resort As banker to the banks the central bank acts as the lender of the last resort. In other words, in case the commercial banks fail to meet their financial requirements from other sources, they can, as a last resort, approach to the central bank for loans and advances. The central bank assists such banks through discounting of approved securities and bills of exchange. This system assures individuals that their bank will able to pay their money back in case of crisis and there is no need to panic. Thus , the central bank assumes the responsibility of meeting directly or indirectly all reasonable demand for funds by commercial banks in time of difficulties and crisis. Ans:3 For depositor: This system assures individuals that their bank will able to pay their money back in case of crisis and there is no need to panic. For banking system: It saves a needy bank from a possible collapse. Q.67 Case Study: The most important function of money in that it works as a medium of exchange. Under the barter system, there was great difficulty in exchanging the good due to absence of money, the problem of double coincidence of wants under the barter system has been solved by the evolution of money. Under barter system in order to complete transaction both the persons must have the commodity, other wanted, also due to lack of common measure of value, either of one economy agent was bound to suffer from the loss. But now a person ‘A’ can sell his goods to person ‘B’ for money and then he can use that money to buy the goods he wants from others who have those goods. As long as money is generally acceptable, there will be no difficulty in the process of exchange. Que. 1 Which of the following is a typical characteristic of the barter system:

a) a common medium of exchange b) double coincidence of wants c) a common unit of account d) a standard for deferred payments Answer : b) double coincidence of wants Que. 2 Money which is accepted as a medium of exchange because of the trust between the payer and payee is called: a) full-bodied money b) credit money c) Fiat money d) fiduciary money Answer: d) fiduciary money Que. 3 Introduction of money has: a) separated the acts of sale and purchase of an individual b) combined the acts of sale and purchase of an individual c) expanded the scope of sale and purchase d) both a and c Answer : d) both a and c Que 4. Which one of the following is not a function of money ? a) medium of exchange b) means of barter c) standard of deferred payment d) store of value Answer: b) means of barter