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Money And Banking NCERT Textbook With Solutions Book PDF Free Download
Chapter 3: Money And Banking
Money is the commonly accepted medium of exchange. In an economy that consists of only one individual, there cannot be any exchange of commodities and hence there is no role for money.
Even if there is more than one individual but these individuals do not take part in market transactions, example: family living on an isolated island, money has no function for them.
However, as soon as there is more than one economic agent who engages in transactions through the market, money becomes an important instrument for facilitating these exchanges.
Economic exchanges without the mediation of money are referred to as barter exchanges. However, they presume the rather improbable double coincidence of wants.
Consider, for example, an individual who has a surplus of rice that she wishes to exchange for clothing.
If she is not lucky enough she may not be able to find another person who has the diametrically opposite demand for rice with a surplus of clothing to offer in exchange.
The search costs may become prohibitive as the number of individuals increases. Thus, to
smoothen the transaction, an intermediate good is necessary which is acceptable to both parties. Such a good is called money.
The individuals can then sell their products for money and use this money to purchase the commodities they need.
Through the facilitation of exchanges is considered to be the principal role of money, it serves other purposes as well. Following are the main functions of money in a modern economy.
The demand for money tells us what makes people desire a certain amount of money. Since money is required to conduct transactions, the value of transactions will determine the money people will want to keep: the larger is the quantum of transactions to be made, the larger is the
quantity of money demanded.
Since the quantum of transactions to be made depends on income, it should be clear that a rise in income will lead to rise in demand for money.
Also, when people keep their savings in the form of money rather than putting it in a bank that gives them interest, how much money people keep also depends on the rate of interest.
Specifically, when interest rates go up, people become less interested in holding money since holding money amounts to holding less interest-earning deposits, and thus less interest received. Therefore, at higher interest rates, money demanded comes down.
Central Bank is a very important institution in a modern economy. Almost every country has one central bank. India got its central bank inIts name the ‘Reserve Bank of India’.
The central bank has several important functions. It issues the currency of the country. It controls the money supply of the country through various methods, like bank rates, open market operations, and variations in reserve ratios.
It acts as a banker to the government. It is the custodian of the foreign exchange reserves of the economy. It also acts as a bank in the banking system, which is discussed in detail later.
From the point of view of money supply, we need to focus on its function of issuing currency.
This currency issued by the central bank can be held by the public or by the commercial banks, and is called the ‘high-powered money or ‘reserve money’ or ‘monetary base’ as it acts as a basis for credit creation.
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NCERT Solutions Class 12 Economics Chapter 3 Money And Banking
1. What is a barter system? What are its drawbacks?
A barter system is used in ancient times for exchanging goods. It was a system where one commodity was exchanged for another.
Like we can say that a person has 1 kg of wheat and he wants to have 1 kg of rice in exchange for that, he can exchange the same if there is someone who is willing to exchange rice for wheat. It was called a commodity for commodity exchange. Later it was replaced by monetary system. The drawbacks of the barter system are:
1. It suffered from the double coincidence of wants that means two individuals should be complementing each other in their requirement in order for the exchange to happen. For e.g wheat for rice.
2. There was a lack of standard measurement i.e. value of the good of one item was not always equal to the other item being exchanged for. For e.g exchange of rice for cow.
3. It was difficult to store the items that were obtained from exchange for future exchanges, as many items perished.
4. It was difficult to make future payments and contractual payments.
2. What are the main functions of money? How does money overcome the shortcomings of a barter system?
Money had the following functions:
Primary functions are as follows:
a. Money served as the medium of exchange and facilitated buying and selling of goods and services. The exchange was simple and could be scaled accordingly.
b. Money served as a common source of value for the goods. In a barter system, it was not possible to determine the value of an item. But money made it possible to value goods. So it served as a measure of value.
Secondary functions are as follows:
a. Money could be easily stored as compared to the goods that were received in exchange in a barter system. So it acted as a store of value.
b. Deferred payments have become much easier with the introduction of money. Loans can be repaid in a much better way as compared to the barter system.
It overcame the following shortcomings of the barter system:
1. It eliminated the double coincidence of wants which was the most important shortcoming in the barter system.
2. It overcame the problem of valuation of goods. In the barter system goods exchanged were not proper in value with each other.
3. It facilitated contractual payments and future payments that were not possible in the barter system.
4. It was easy to store money than perishable goods as was provided in the barter system.
NCERT Class 12 Economics Textbook Chapter 3 Money And Banking With Answer PDF Free Download