NCERT Solutions for Class 12 Economics (Macroeconomics) Chapter 3 Money and Banking
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Page 1
NCERT
SOLUTIONS
CLASS - 12th
aglase .co
SOLUTIONS
CLASS - 12th
aglase .co
Page 2
Book : Introductory Macroeconomics Ncert Solutions | Chapter - 3 Economics
Class : 12th
Subject : Economics
Chapter : 3
Chapter Name : Money and Banking
Q1 What is a barter system? What are its drawbacks?
Answer. Presently, money is the commonly accepted medium of exchange. Before the evolution
of money, goods were exchanged through a system called barter system. In this system, people
used to exchange goods in exchange for other goods without the involvement of money.
The major drawbacks of the barter system were as follows -
Lack of double coincidence - It was a major drawback of the system. Double coincidence refers
to the arrangement under which the person who wants to purchase some goods must provide
consideration required by the other person. Under the barter system, the person exchanging his
goods may not have the requisites of the other person.
Lack of common measurement - There was absence of a common unit of measurement. The
goods couldn't be valued without the presence of a common unit, which is why money was
demanded.
Lack of standard for deferred payments - Deferred payment means payment at a future date.
Since the values of commodities is fast changing, hence it wasn't possible to measure their
value in future.
Q2 What are the main functions of money? How does money overcome the shortcomings of a
better system?
Answer. Money serves the following purposes and overcomes the difficulties of barter system -
1. It acts as a convenient unit of account. The value of all goods and services can be
expressed in monetary units.
Page 1 of 6
Class : 12th
Subject : Economics
Chapter : 3
Chapter Name : Money and Banking
Q1 What is a barter system? What are its drawbacks?
Answer. Presently, money is the commonly accepted medium of exchange. Before the evolution
of money, goods were exchanged through a system called barter system. In this system, people
used to exchange goods in exchange for other goods without the involvement of money.
The major drawbacks of the barter system were as follows -
Lack of double coincidence - It was a major drawback of the system. Double coincidence refers
to the arrangement under which the person who wants to purchase some goods must provide
consideration required by the other person. Under the barter system, the person exchanging his
goods may not have the requisites of the other person.
Lack of common measurement - There was absence of a common unit of measurement. The
goods couldn't be valued without the presence of a common unit, which is why money was
demanded.
Lack of standard for deferred payments - Deferred payment means payment at a future date.
Since the values of commodities is fast changing, hence it wasn't possible to measure their
value in future.
Q2 What are the main functions of money? How does money overcome the shortcomings of a
better system?
Answer. Money serves the following purposes and overcomes the difficulties of barter system -
1. It acts as a convenient unit of account. The value of all goods and services can be
expressed in monetary units.
Page 1 of 6
Page 3
Book : Introductory Macroeconomics Ncert Solutions | Chapter - 3 Economics
2. Money also acts as a medium of exchange in which the commodities can be
exchanged.
3. Barter exchanges becomes extremely difficult in a large economy because of the high
costs people would have to incur looking for suitable persons to exchange their surplus.
Money overcomes this problem.
4. In the barter system, it is very difficult to measure the future value of commodities.
Money solves this problem as it provides a standard unit of measurement.
Q3 What is transaction demand for money? How is it related to the value of transactions over a
specified period of time ?
Answer. The transaction demand for money refers to the requirement of money for making
transactions at regular intervals. If a person is earning his income in the beginning of the month,
then he makes many transactions everyday in satisfying his wants. This demand arises
because the payments and receipts of people are never equal. They keep on changing from
time to time and hence money acts as a medium of measurement of these transactions.
Q4 What are the alternative definitions of money supply of india ?
Answer. There are four alternative definitions of money supply in India. These are explained as
under -
M1 - It is a narrow concept of measuring the money supply. Under this, we get the total money
supply in the economy by adding the currency held by the public and demand deposits kept with
the commercial banks on behalf of the public.
M2 - It is calculated as follows - M1 + Savings deposits with Post Office savings banks.
It includes those deposits which the public deposits with the post offices by opening the savings
accounts in addition to the money supply calculated in M1.
Page 2 of 6
2. Money also acts as a medium of exchange in which the commodities can be
exchanged.
3. Barter exchanges becomes extremely difficult in a large economy because of the high
costs people would have to incur looking for suitable persons to exchange their surplus.
Money overcomes this problem.
4. In the barter system, it is very difficult to measure the future value of commodities.
Money solves this problem as it provides a standard unit of measurement.
Q3 What is transaction demand for money? How is it related to the value of transactions over a
specified period of time ?
Answer. The transaction demand for money refers to the requirement of money for making
transactions at regular intervals. If a person is earning his income in the beginning of the month,
then he makes many transactions everyday in satisfying his wants. This demand arises
because the payments and receipts of people are never equal. They keep on changing from
time to time and hence money acts as a medium of measurement of these transactions.
Q4 What are the alternative definitions of money supply of india ?
Answer. There are four alternative definitions of money supply in India. These are explained as
under -
M1 - It is a narrow concept of measuring the money supply. Under this, we get the total money
supply in the economy by adding the currency held by the public and demand deposits kept with
the commercial banks on behalf of the public.
M2 - It is calculated as follows - M1 + Savings deposits with Post Office savings banks.
It includes those deposits which the public deposits with the post offices by opening the savings
accounts in addition to the money supply calculated in M1.
Page 2 of 6
Page 4
Book : Introductory Macroeconomics Ncert Solutions | Chapter - 3 Economics
M3 - It is also known as broad money and aggregate monetary resources. Under this, we also
include deposits with commercial banks in their fixed deposits accounts or the recurring
deposits (together known as time deposits) accounts along with the money supply in M1.
M4 - It is also known as broad money. It is calculated as under -
M3 + Total savings of public held by the Post offices (excluding national savings
certificate).
It combines all the money supply resources of the economy.
Q5 What is a ‘legal tender’? What is ‘fiat money’?
Answer. The currency notes and coins don't have their own intrinsic value. Their value is
determined by the purchasing power which they give to the holder of such currency. The value
of money is printed on the notes or coins. This is known as fiat money.
The legal tender is the money which should be acceptable to all the citizens and no one can
refuse to accept them in settlement of their transactions. These currency notes and coins are
approved by the Reserve Bank of India and hence are the legal tender.
Q6 What is High powered money?
Answer. High powered money is the currency issued by the Government of India and the
Reserve Bank of India. It also consists of the reserves kept with the banks. It is the total liability
of the monetary authority of the country. It can be calculated as -
Total currency circulated in the economy + reserves kept with the banks.
Page 3 of 6
M3 - It is also known as broad money and aggregate monetary resources. Under this, we also
include deposits with commercial banks in their fixed deposits accounts or the recurring
deposits (together known as time deposits) accounts along with the money supply in M1.
M4 - It is also known as broad money. It is calculated as under -
M3 + Total savings of public held by the Post offices (excluding national savings
certificate).
It combines all the money supply resources of the economy.
Q5 What is a ‘legal tender’? What is ‘fiat money’?
Answer. The currency notes and coins don't have their own intrinsic value. Their value is
determined by the purchasing power which they give to the holder of such currency. The value
of money is printed on the notes or coins. This is known as fiat money.
The legal tender is the money which should be acceptable to all the citizens and no one can
refuse to accept them in settlement of their transactions. These currency notes and coins are
approved by the Reserve Bank of India and hence are the legal tender.
Q6 What is High powered money?
Answer. High powered money is the currency issued by the Government of India and the
Reserve Bank of India. It also consists of the reserves kept with the banks. It is the total liability
of the monetary authority of the country. It can be calculated as -
Total currency circulated in the economy + reserves kept with the banks.
Page 3 of 6
Page 5
Book : Introductory Macroeconomics Ncert Solutions | Chapter - 3 Economics
Q7 Explain the functions of a commercial bank.
Answer. The commercial bank is the bank which directly deals with the public. There are two
basic functions of a commercial bank which are accepting deposits from the public and lending
money for various purposes.
A commercial bank accepts deposits in various forms like savings accounts, recurring deposits,
fixed deposits and current account deposits. It also provides interest to the public on their
deposits.
It also provides loan for various productive and non-productive activities. It may provide loan to
public or to businesses. Bank charges interest on such loans.
Other than these services, banks provide several other services like locker facility, accepting
deposits and payments made on behalf of customers, etc.
Q8 What is money multiplier? What determines the value of this multiplier?
Answer. The money multiplier is the power of the commercial banks to increase their money
supply by providing loans to its customers. The working of this multiplier can be under by the
following example -
Suppose a person deposits ₹1000 in his bank account and bank after keeping 10% as
CRR(Cash Reserve Ratio), lends the remaining ₹900 to Mr. A. Mr. A makes a payment to Mr. B
who deposits the money in his account. So, again bank after keeping 10% CRR(₹90),lends the
rest 810 to Mr. C. If he deposits the money in his account, then again it will be lent and this
process goes on.
This is known as the multiplier. The multiplier is the ratio of total money supply in the economy
and the high powered money.
Page 4 of 6
Q7 Explain the functions of a commercial bank.
Answer. The commercial bank is the bank which directly deals with the public. There are two
basic functions of a commercial bank which are accepting deposits from the public and lending
money for various purposes.
A commercial bank accepts deposits in various forms like savings accounts, recurring deposits,
fixed deposits and current account deposits. It also provides interest to the public on their
deposits.
It also provides loan for various productive and non-productive activities. It may provide loan to
public or to businesses. Bank charges interest on such loans.
Other than these services, banks provide several other services like locker facility, accepting
deposits and payments made on behalf of customers, etc.
Q8 What is money multiplier? What determines the value of this multiplier?
Answer. The money multiplier is the power of the commercial banks to increase their money
supply by providing loans to its customers. The working of this multiplier can be under by the
following example -
Suppose a person deposits ₹1000 in his bank account and bank after keeping 10% as
CRR(Cash Reserve Ratio), lends the remaining ₹900 to Mr. A. Mr. A makes a payment to Mr. B
who deposits the money in his account. So, again bank after keeping 10% CRR(₹90),lends the
rest 810 to Mr. C. If he deposits the money in his account, then again it will be lent and this
process goes on.
This is known as the multiplier. The multiplier is the ratio of total money supply in the economy
and the high powered money.
Page 4 of 6
Page 6
Book : Introductory Macroeconomics Ncert Solutions | Chapter - 3 Economics
Q9 What are the instruments of monetary policy of RBI?
Answer. The major instruments of the monetary policy of RBI are categorised into two parts -
1. Quantitative measures
a. Bank Rate - It is the rate at which the Reserve Bank of India lends money to the
commercial banks. The cost of such money (i.e. the interest on it) determines the
flow of credit in the economy.
b. Open market operations - RBI may sale or purchase the government approved
first class securities from the open markets to increase or decrease the money
supply.
c. Cash Reserve Ratio and Statutory Liquidity Ratio - Cash Reserve Ratio is the
total amount of deposits which the banks have to keep in the form of cash.
Statutory liquidity ratio is the ratio of the total deposits kept by the commercial
banks in the form of cash, gold or other securities.
2. Qualitative measures
● Margin requirement - The difference between the value of the security kept with
the bank and the amount of loan issued against the security. More this difference,
less will be the credit.
● Rationing of credit - It fixes the quota for the amount of loan to be issued for
every commercial activity.
● Moral suasion - Reserve Bank of India to persuade the commercial banks to
implement the general monetary policy of the country.
Q10 Do you consider a commercial bank ‘creator of money’ in the economy?
Answer. Yes, the commercial bank is the creator of the money in the economy. Banks accept
deposits from the general public and create credit by lending it to other people. It then expands
the credit by credit multiplier. The credit multiplier is the ratio of total money supply in the
economy and the high powered money. Higher the credit multiplier, higher is the credit that the
commercial banks can create.
Page 5 of 6
Q9 What are the instruments of monetary policy of RBI?
Answer. The major instruments of the monetary policy of RBI are categorised into two parts -
1. Quantitative measures
a. Bank Rate - It is the rate at which the Reserve Bank of India lends money to the
commercial banks. The cost of such money (i.e. the interest on it) determines the
flow of credit in the economy.
b. Open market operations - RBI may sale or purchase the government approved
first class securities from the open markets to increase or decrease the money
supply.
c. Cash Reserve Ratio and Statutory Liquidity Ratio - Cash Reserve Ratio is the
total amount of deposits which the banks have to keep in the form of cash.
Statutory liquidity ratio is the ratio of the total deposits kept by the commercial
banks in the form of cash, gold or other securities.
2. Qualitative measures
● Margin requirement - The difference between the value of the security kept with
the bank and the amount of loan issued against the security. More this difference,
less will be the credit.
● Rationing of credit - It fixes the quota for the amount of loan to be issued for
every commercial activity.
● Moral suasion - Reserve Bank of India to persuade the commercial banks to
implement the general monetary policy of the country.
Q10 Do you consider a commercial bank ‘creator of money’ in the economy?
Answer. Yes, the commercial bank is the creator of the money in the economy. Banks accept
deposits from the general public and create credit by lending it to other people. It then expands
the credit by credit multiplier. The credit multiplier is the ratio of total money supply in the
economy and the high powered money. Higher the credit multiplier, higher is the credit that the
commercial banks can create.
Page 5 of 6
Page 7
Book : Introductory Macroeconomics Ncert Solutions | Chapter - 3 Economics
Q11 What role of RBI is known as ‘lender of last resort’?
Answer. RBI is the apex banking institution. It lends money to the commercial banks to meet
their short term and long term financial requirements. RBI provides funds to the commercial
banks by discounting their first class securities or pledging of their securities. This function of
RBI makes it a lender of last resort.
Page 6 of 6
Q11 What role of RBI is known as ‘lender of last resort’?
Answer. RBI is the apex banking institution. It lends money to the commercial banks to meet
their short term and long term financial requirements. RBI provides funds to the commercial
banks by discounting their first class securities or pledging of their securities. This function of
RBI makes it a lender of last resort.
Page 6 of 6
Document Details
| Board / Org | NCERT |
| Exam | Class 12 |
| Type | Solution |
| Pages | 7 |
| Updated | 30 Apr 2026 |