Economics Notes (Class 12)

CBSE Class 12 Economics Macroeconomics Chapter 3 Money and Banking

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Money and Banking

Money and Banking

Money and Banking

Important Notes

1. Barter System Barter system means the direct exchange of one commodity to another.

2. Barter Economy can be termed as C-C economy i.e., Commodity for Commodity economy.

3. Difficulties of Barter System
(i) Lack of double coincidence
(ii) Lack of divisibility
(iii) Lack of common measure
(iv) The difficulty of storage and transfer of wealth
(v) Difficulty in deferred payment
(vi) Difficulty in the exchange of services

4. Money: Money is anything that is generally accepted as a means of exchange and at the same time, act as a measure and as a store of value.

5. Functions of Money
(i) Primary Function
(a) Medium of exchange
(b) Measure of value
(ii) Secondary Function of Money
(a) Standard of deferred payments
(b) Store of value
(c) Transfer of value
(iii) Contingent Functions
(a) Distribution of national income
(b) Maximum satisfaction to the consumers
(c) Maximum profit to the producers
(d) Basis of credit
(e) Liquidity

6. Fiat Money It refers to money by order/authority of the government. It includes notes and coins.

7. Fiduciary Money it refers to money backed up by trust between the payer and the payee.

8. Money Supplier In modern times. the sources of supply of money are government, central bunk of the country and commercial banks.

9. High powered Money It includes currency (R) with the public and cash (c) reserves with banks. High powered money =R+ C

10 Banking: Banking implies accepting deposits of money from the public for the purpose of lending or investment which is repayable on demand and can be withdrawn by means of cheques, draft order etc.

11. Commercial Bank A commercial bank is a financial institution engaged in the business of accepting deposits and making loans to the people.

12. Central Bank A central bank is an apex institution of a country that controls and regulates the monetary and financial system of the country.

13. Functions of Commercial Banks
(i) Acceptance of deposits from the public
(ii) Advancing of loans
(iii) Investment of funds
Agency Functions
(a) Remittance of funds
(b) Collection and payment of fund
(c) Sale and purchase of security
(d) Representation and correspondence
(e) Trusteeship
(v) General utility functions
(vi) Credit creation

14. Factors Affecting Credit Creation 
(i) Primary cash deposits
(ii) Cash reserve ratio
(iii) Banking habits of the people
(iv) The policy of the central

15. Functions of Central Banks (RBI)
(i) Bank of issue
(ii) Banker, agent and advisor to the government
(iii) Custodian of the cash reserves of commercial banks
(iv) Custodian of nation’s reserves of international currency
(v) Lender ‘ofthe last resort
(vi) Bank of central clearance
(vii) Controller of money supply and credit

16. Instruments of Monetary Policy or Credit Control Measures
(j) Quantitative Instruments
(a) Bank rate
(b) Open market operation
(c) Cash Reserve Ratio (CRR)
(d) Statutory Liquidity Ratio (SLR)
(ii) Qualitative Instruments
(a) Margin requirement
(b) Rationing of credit
(c) Direct action
(d) Moral suasion

17. Cash Reserve Ratio (CRR) It refers to the minimum percentage of a bank’s total deposits required to be kept with the central bank.

18. Statutory Liquidity Ratio (SLR) Every bank is required to maintain a fixed percentage of its assets in the form of cash 0r other liquid assets.

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