10th Standard Social Money and Credit

 Money and Credit

 I. Fill in the blanks with suitable answers.

1. Barter is the exchange of goods for Goods.
2. A cheque is a withdraw form of money.
3. The Reserve Bank of India was established in the year 1935, April 1^st.
4. The currency of Japan is yen.
5. Government of India nationalized 14 commercial Banks in 1969.
6. Narrow money comprises of M1 & M2
7. Inflation occurs when supply of money is more than the availability of goods and services in a country.

II. Answer the following questions.

1.What is Barter system?
Ans: In the primitive stage, people exchanged goods for goods without the use of money. Barter was extremely difficult method of trade. For example if you had cow and wanted sheep in exchange, you had to search an individual who not only had a sheep but also who needed cow in exchange. If finally, you came across such an individual then the question is how many sheep are equivalent to one cow? Hence, barter system had many deficiencies for easy transactions.

 

2. Explain the meaning and functions of money.
Ans: The metallic coins were unsafe to carry from one place to another. Therefore, traders began to carry the written documents issued by well-known financiers as evidence of the quantity of money at their command. The written documents were not actual money but were accepted and exchanged for money. When such documents were issued by governments, they were called as promissory notes’ or currency. Later on, the central banks established by the government started printing notes that had the guarantee of the government. This paper money became legal tender that is the legally acceptable money. No individual can refuse the legal tender in that respective country. The legal tender is called as Rupee in India: Dollar in the USA; Pound in England: Euro in Europe: Yen in Japan: Yuan in China, etc.

The function of Money:

a) Primary or main functions:

Medium of exchange or means of payment: Money is used for selling and buying goods and making corresponding payments.

Measure of Value: The prices of all goods and services are expressed in terms of money only.

 

b) Secondary functions:

Standard of deferred payments: Money eases future transactions too. A borrower is under an obligation to pay a specified sum of money on a specified future date.

Store of value: Since the future value is assured, money has made it possible to save or store wealth for the future and help in its accumulation.

Transfer of value: The introdu¬ction of money has made the exchange of goods to distant places possible.

 

3. Explain the functions of RBI.
Ans: A monopoly of Note issue: RBI has the monopoly of issuing currency notes of Rs 2 and above, namely Rs 5, Rs 10, Rs 20, Rs 100, Rs 200, Rs 500, and Rs 2000. One Rupee is issued and circulated by RBI on behalf of the Central Government.

Banker to Government: The RBI accepts the deposits of Central and State Governments, collects money (like taxes and other charges) and also makes payments on behalf of the Government.

Bankers’ bank: It also acts as the bank for all banking institutions in the country. All the banks of the country have to keep a predetermined part of their deposits as reserves with the RBI.

National Clearing House: RBI acts as the clearinghouse for the settlement of transactions across banks. This function helps banks to settle their inter banks claims easily.

Controller of credit: The RBI regulates the amount of credit issued by the banks, according to the monetary situation of the country.

 

4. Explain the various concepts of money supply used in India.

Ans: Barter System: In the primitive stage, people exchanged goods for goods without the use of money. Barter was an extremely difficult method of trade. Barter system had many deficiencies for easy transactions.

Commodity money: Later on the societies started using some commodities against which goods were exchanged. Cattle in Greece, Sheep in Rome, etc

Metallic money: Gradually, precious metals like Gold, Silver, Bronze, etc. began to be used as money.

Paper money: The metallic coins were unsafe to carry from one place to another. Therefore, traders began to carry the written documents issued by well-known financiers as evidence of the quantity of money at their commands:

Bank money: As trade and commerce flourished bankers started issuing’ instruments for still easy transaction, cheques, drafts, deposit, receipts etc.

Plastic money: Very recently the banks have innovated plastic cards known as the credit and debit cards through which transactions and transfers of money have become still easier.

 

5. Discuss the various credit control methods adopted by RBI.
Ans: Credit control measures Broadly classified into 2 types

a. Quantitative central measures
i. Bank Rate Policy: The bank rate is the rate at which the RBI lends funds to banks. This affects the rate at which banks can lend to their borrowers. Higher the bank rate, lower the credit creation, and vice-versa. RBI also varies the Repo Rate and Reverse Repo Rate affecting the interest rate on short term borrowings and deposits, respectively, by the commercial banks, thereby affecting their capacity to lend.

ii. Open Market Operations: Open market operations is the buying and selling of government securities by the central bank from and to the banks. The sale of government securities to banks reduces their reserves and vice-versa.

iii. Varying Reserve Requirements (Legal Reserve Ratio): Banks are obliged to maintain reserves with the central bank in two accounts. One is the(Cash Reserve Ratio (CRR) and the other is Statutory Liquidity Ratio (SLR). The ratio of their deposits, which the banks are required to keep with RBI, is the CRR. The minimum cash which the banks have to keep with themselves as a ratio of their deposits is the SLRA By varying these CRR and SLR the RBI can vary the lending capacity of banks.

 

b. Qualitative credit central measures
i. Change in lending margins: Collateral security is required for obtaining any loan. The percentage value of the security required to be kept with the bank for getting loan is called as the margin. Margin against particular security is reduced or increased in order to encourage or to discourage the flow of credit to a particular sector.

ii. Ceiling on credit or credit rationing: The RBI fixes the maximum amount of credit given to a particular use or sector) The rationing of credit is done to prevent excessive expansion of credit.

iii. Moral suasion: Moral suasion is a method of persuading commercial banks to advance the credit or reduce the credit to certain activities. The RBI does this through periodical letters and circulars to the banks.

iv. Direct Action: Direct control consists of the measures taken by the central bank against commercial banks and financial institutions when all other methods prove ineffective.