NCERT Solutions for Class 12 Economics Introductory Macroeconomics Chapter 3

Money and Banking Class 12

Chapter 3 Money and Banking Exercise Solutions

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Exercise : Solutions of Questions on Page Number : 46

Q1 :  

What is a barter system? What are its drawbacks?


Answer :

Barter system is a system that was used in ancient times to exchange goods. In other words, this system was used to exchange one commodity for another before the monetary system came into existence. For example, if a person having rice wants tea, then he can exchange rice with a person who has tea and needs rice. The economy having the barter system was called 'C-C economy', i.e. commodity is exchanged for commodity.

The various drawbacks of the barter system are as follows:

1. Problem of double coincidence of wants

Double coincidence of wants implies that needs of two individuals should complement each other for the exchange to take place. For example, in the above case, the second person must need rice in exchange of tea.

2. Lack of common unit of value

Under barter system there was no common unit for measuring the value of one good in terms of the other good for the purpose of exchange. For example, a horse cannot be measured in terms of rice in the case of exchange between rice and horse.

3. Difficulty in wealth storage

It was very difficult to store commodities for future exchange purposes. The perishable goods like grains, milk and meat could not be stored to exchange goods in future. Therefore, wealth storage was a major difficulty of batter system.

4. Lack of standard of deferred payments

The future payments could not be met in a C-C economy (barter system) as wealth could not be stored. It was very difficult to pay back loans.

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Q2 :  

What are the main functions of money? How does money overcome the shortcomings of a barter system?


Answer :

The main functions of money are as follows:

1. Medium of exchange

Money acts as a medium of exchange as it facilitates exchange through a common medium, i.e. currency. In other words, money helps in the buying and selling of goods. For example, a person can sell his goods to another for money and that person can use money to purchase goods of his choice. Money solves the problem of double coincidence of wants.

2. Unit of value

The values of goods can be measured in terms of money. It is a common medium through which we can calculate the value of each and every good. The value of a good in terms of money is called the price. In barter system the lack of a common denominator for measuring values of goods was a major drawback.

3. Store of value

This function explains the importance of money as value storage. This implies that wealth in the form of money can be stored easily as a medium of exchange for future use. For example, money can be stored in banks for meeting emergency and future needs.

4. Standard of deferred payments

Payments can easily be made through the medium of money. In other words, it is very difficult to pay back a loan in terms of goods and services. However, with the advent of money the payments of loans or interests can easily be made.

Money overcomes the shortcomings of barter system in the following manner:

1. Money solves the problem of double coincidence of wants. For example, if a person needs wheat in exchange of tea, then he/she must search for a person who is ready to trade wheat for tea. Money made the need for such searches redundant.

2. In barter system, it was very difficult to measure the value of one good in terms of another. For example, it is difficult to calculate the value of a cow in terms of wheat.

3. It was very difficult to store goods, especially perishable goods (fruits, meat, etc.) for the purpose of value storage. Money serves this purpose.

4. The contractual or future payments are much difficult to be made in barter system. For example, a worker working on contract basis could not be paid in terms of rice or chairs.

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Q3 :  

What is transaction demand for money? How is it related to the value of transactions over a specified period of time?


Answer :

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Q4 :  

Suppose a bond promises Rs.500 at the end of two years with no intermediate return. If the rate of interest is 5 per cent per annum what is the price of the bond?


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Q5 :  

Why is speculative demand for money inversely related to the rate of interest?


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Q6 :  

What is `liquidity trap'?


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Q7 :  

What are the alternative definitions of money supply in India?


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Q8 :  

What is a 'legal tender'? What is 'fiat money'?


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Q9 :  

What is High Powered Money?


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Q10 :  

Explain the functions of a commercial bank.


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Q11 :  

What is money multiplier? How will you determine its value? What ratios play an important role in the determination of the value of the money multiplier?


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Q12 :  

What are the instruments of monetary policy of RBI? How does RBI stabilize money supply against exogenous shocks?


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Q13 :  

Do you consider a commercial bank 'creator of money' in the economy'?


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Q14 :  

What role of RBI is known as 'lender of last resort'?


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Introductory Macroeconomics - Economics : CBSE NCERT Exercise Solutions for Class 12th for Money and Banking will be available online in PDF book form soon. The solutions are absolutely Free. Soon you will be able to download the solutions.

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