Chapter 3 – Money and Banking (secound book)
Q1. What is money?
Money is anything widely accepted as a medium of exchange, measure of value, store of value, and standard for deferred payments.
Q2. What are the four functions of money?
- Medium of exchange
- Unit of account
- Store of value
- Standard of deferred payments
Q3. What are the components of money supply?
Money supply includes currency held by the public and demand deposits of commercial banks:
M1 = Currency + Demand Deposits + Other Deposits with RBI
Q4. What is M1 in money supply?
M1 includes currency with the public, demand deposits with banks, and other deposits with RBI — most liquid form of money.
Q5. What is M2, M3, M4?
- M2 = M1 + Savings deposits in post office
- M3 = M1 + Time deposits with banks
- M4 = M3 + Total deposits with post office
Q6. What is high-powered money?
Also called Reserve Money or Base Money, it includes currency held by public and cash reserves of commercial banks with RBI.
Q7. What is a commercial bank?
A financial institution that accepts deposits from the public and provides loans, credit, and other financial services for profit.
Q8. What is credit creation?
The process by which commercial banks lend more than their reserves through the deposit multiplier effect, expanding the money supply.
Q9. What is the credit multiplier formula?
Credit Multiplier = 1 / Legal Reserve Ratio (LRR)
Q10. What is LRR (Legal Reserve Ratio)?
The fraction of total deposits that banks must keep as reserve with themselves or RBI — includes CRR and SLR.
Q11. What is CRR (Cash Reserve Ratio)?
The percentage of total deposits banks must keep as reserves with RBI in cash — affects liquidity and credit creation.
Q12. What is SLR (Statutory Liquidity Ratio)?
The minimum percentage of deposits banks must maintain in liquid assets (gold, government securities) with themselves.
Q13. What is the central bank?
The apex monetary authority of a country that regulates the money supply, controls credit, and manages currency and foreign reserves.
Q14. What is the RBI?
Reserve Bank of India — India’s central bank, which issues currency, controls credit, and regulates the banking system.
Q15. What are the functions of RBI?
Currency issuance, credit control, banker to government, custodian of foreign exchange, lender of last resort.
Q16. What is the difference between commercial and central bank?
Commercial banks deal with the public and aim for profit; central bank regulates the economy and banking system.
Q17. What is quantitative credit control?
Instruments like CRR, SLR, Repo Rate, Bank Rate used by RBI to regulate the overall credit supply in the economy.
Q18. What is qualitative credit control?
Selective measures like margin requirements and credit rationing used to influence specific sectors of the economy.
Q19. What is the bank rate?
The rate at which RBI lends money to commercial banks without collateral. A tool to influence credit and money supply.
Q20. What is the repo rate?
The rate at which RBI lends to commercial banks against government securities for short-term liquidity.
Q21. What is the reverse repo rate?
The rate at which RBI borrows from commercial banks, helping absorb excess liquidity from the banking system.
Q22. What is open market operation (OMO)?
Buying or selling government securities by RBI to control liquidity and regulate money supply.
Q23. What is margin requirement?
The difference between the value of loan and collateral security, used to control sectoral credit flow.
Q24. What is credit control?
The central bank’s process of regulating the availability, cost, and use of credit to achieve economic stability.
Q25. What is money creation by commercial banks?
Banks lend a portion of deposits, creating credit. This credit re-enters the system as deposits, expanding money supply.
Q26. What is monetary policy?
Policy by the central bank to control inflation, maintain liquidity, and ensure economic stability using credit control tools.
Q27. What happens when RBI increases CRR?
Less money is available for lending, reducing credit creation, curbing inflation, and controlling excess demand.
Q28. What happens when RBI reduces repo rate?
Borrowing becomes cheaper for banks, increasing lending, boosting investment and demand in the economy.
Q29. What is liquidity?
The ease with which assets can be converted into cash without loss. Currency is the most liquid asset.
Q30. Why is the central bank called the lender of last resort?
Because it provides emergency funds to banks facing liquidity crises to prevent bank failures and maintain stability.