Class 12 Money & Banking Test Questions
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tarun aroraClass 12 Money & Banking Test Questions
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Powered by AIRetaining the benchmark lending rate at 6.5% and focusing on withdrawing accommodating monetary policy indicates a shift towards tighter monetary conditions. This approach helps control inflation by reducing excess liquidity in the economy. Such a strategy is typically used when there is a need to stabilize prices and manage inflationary pressures .
An increase in the bank rate raises the cost of borrowing for commercial banks from the Central Bank, which generally leads to higher interest rates for loans provided by commercial banks. This results in reduced credit creation, as higher rates discourage borrowing by businesses and consumers, thereby slowing down economic activity .
The components of M1 measure of money supply include physical currency held by the public, demand deposits at commercial banks, and other liquid deposits that can quickly be converted into cash. M1 is significant because it represents the most liquid forms of money, which are readily available for transactions .
An increase in the reserve deposit ratio reduces the credit creation power of the banking system, as banks must hold a larger proportion of deposits as reserves, limiting the amount available for lending. For example, if the reserve ratio increases from 10% to 20%, with initial deposits of ₹ 100, the bank can now only lend ₹ 400 instead of ₹ 900 previously, thereby reducing money supply in the economy .
If the Reserve Bank of India had lowered the benchmark lending rate, it would likely increase the money supply. Lower rates reduce borrowing costs for banks, encouraging them to increase lending to businesses and consumers. This leads to an increase in money circulation and can stimulate economic activity .
The value of the reserve requirement is 0.1 or 10%. This is calculated using the formula for the reserve requirement ratio: Reserve Requirement = 1 / Money Multiplier. Given that the total deposits created are 10 times the initial deposits, the money multiplier is 10, leading to a reserve requirement of 0.1 .
While the barter system allows for direct exchange of goods and services, it is inefficient in modern economies due to the lack of a common measure of value and difficulty in storing wealth. Money overcomes these limitations by acting as a 'standard of deferred payment', allowing transactions to occur over time with agreed repayment terms, thus facilitating complex economic activities and long-term financial planning .
Lowering the Cash Reserve Ratio (CRR) increases the lending capacity of commercial banks as it reduces the proportion of deposits that banks must keep as reserves with the Central Bank, thus freeing up more funds for lending. Conversely, increasing the CRR decreases banks' lending capacity by requiring them to hold a larger portion of their deposits as non-lendable reserves .
Ms. Sakshi is explaining the concept of the Cash Reserve Ratio (CRR), which is the minimum percentage of a bank's total deposits that must be held as reserves with the Central Bank. This requirement ensures that banks maintain a certain level of liquidity and stability .
As the 'Government's bank', the central bank manages the government's accounts and debt financing, executes government financial transactions, and advises on fiscal and economic policy. This function ensures that the government has the necessary financial resources and stability to implement monetary policy effectively, impacting inflation control and economic growth .