Macroeconomics , Class-12th,Ch-4,Money , Notes

1. What is Barter system? What are its drawbacks? [3 Marks]

Ans : Barter system of exchange is a system in which goods are exchanged for goods.
It’s Drawbacks are:

1. Lack of double coincidence of wants.

2. Lack of divisibility.
3. Difficulty in storing wealth.
4. Absence of common measure of value.
5. Lack of standard of deferred payment.
2. What are the main functions of money? How does money overcome the
shortcoming of a barter system?
[6 Marks] Or
Explain the problem of double coincidence of wants faced under barter system.
How has money solved it? [CBSE 2013 ]
Ans:

1. “Money is a matter of the following four functions: A medium, a

measure, a standard, a store”.
2. Money has overcome the short¬coming of a barter system in the
following manner:
(a) Medium of exchange
• Under barter system, there is lack of double coincidence of
wants.
• With money as a medium exchange individuals can exchange
their goods and services for money and then use this money to
buy other goods and services according to their needs and
conveniences.
• A buyer can buy goods through money and a seller can sell
goods for money.
(b) Measure of value
• Under barter system, there was no common measure of value.
Money has also solved this difficulty.
• As Geoffrey Crowther puts it, “Money acts as a standard
measure of value to which all other things can be compared.”
 Money measures the value of economic goods.
• Money works as a common denominator into which the values
of all goods and services are expressed.
• When we express the values of a commodity in terms of money,
it is called price and by knowing prices of the various
commodities, it is easy to calculate exchange ratios between
them.
(c) Store of value
• Under barter system it is very difficult to store wealth for future
use.
• Most of the goods are perishable and their storage requires
huge space and transportation cost.
• Wealth can be conveniently stored in the form of money.
• Money can be stored without loss in value.
• Money can easily be stored for future use.
(d) Standard of deferred payments
• Under barter system, transactions on deferred payments are not
possible.
• With money, the debtors make a promise that they will make
payments on some future dates. In those situations money acts
as a standard of deferred payments.
• It has become possible because money has general
acceptability, its value is stable, it is durable and homogeneous.
3. What is transaction demand for money? How is it related to the value of
transactions over specified period of time?
Ans: Deleted from syllabus.

4. Why is speculative demand for money inversely related to the rate of interest?
Ans:Deleted from syllabus

5. What are the alternative definitions of money supply in India?[3-4 Marks]

Ans: The alternative definitions of money supply in India can be the four measures of
money supply. They are explained as under:
Measures of M1 include:

1. Currency notes and coins with the public (excluding cash in hand
of all commercial banks) [C]
2. Demand deposits of all commercial and co-operative banks
excluding inter-bank deposits. (DD),

2
 Where demand deposits are those deposits which can be
withdrawn by the depositor at any time by means of cheque. No
interest is paid on such deposits.
3. Other deposits with RBI [O.D]
M = C + DD + OD Where, Other deposits are the deposits held
1

by the RBI of all economic units except the government and

banks. OD includes demand deposits of semi-government public
financial institutions (like IDBI, IFCI, etc.), foreign central banks
and governments, the International Monetaiy Fund, the World
Bank, etc.
Measures of M2

1. M [C + DD + OD]
1

2. Post office saving deposits

Measures of M3

1. M1

2. Time deposits of all commercial and co-operative banks.

Where, Time deposits are the deposits that cannot be withdrawn
before the expiry of the stipulated time for which deposits are
made. Fixed deposit is an example of time deposit.
Measures of M4

1. M 3

2. Total deposits with the post office saving organization (excluding

national savings certificates).
6. What is a ‘legal tender’? What is ‘fiat money’?
Ans:

1. Legal tender:
(a) Legally, money is anything proclaimed by law as a medium of
exchange.
(b) Paper notes and coins (together called currency) is money as
a matter of law.
(c) Nobody can refuse its acceptance as medium of exchange.

3
 2. FIAT Money: It is defined as a money which is under the ‘FIAT’
(order/authority) of the government to act as a money.
7. What is High powered money?
Ans: It is money produced by the RBI and the government. It consists of two things:

1. currency held by the public and

2. Cash reserves with the banks.

MORE QUESTIONS SOLVED

I.VERY SHORT ANSWER TYPE QUESTIONS (1 Mark)
1. Define Barter system.
Ans: Barter system of exchange is a system in which goods are exchanged for goods.

2. What is meant by double coincidence of wants?

Ans: Double coincidence of wants means that goods in possession of two different
persons must be useful and needed by each other.

3. Define Money.
Ans:Money is something which is generally acceptable as a medium of exchange and
can be converted into other assets without loosing its time and value.

4. What is the basic characteristic of money?

Ans: Durability and weight.

5. What is the legal definition of money?

Ans: Legally, money is anything proclaimed by law as a medium of exchange. Paper
notes and coins (together called currency) is money as a matter of law.

6. Define money supply.[CBSE Foreign 2004, 2031]

Ans: The stock of money held by the public at a point of time, in an economy,
is referred to as the money supply. Money supply is a stock concept.

7. What items are included in the M3 measure of money supply?

Ans:

1. M (currency notes and coins with public + demand deposits of

3

commercial and co-operative banks + other deposits with RBI),

2. Time deposits of all commercial and co-operative banks.

4
8. State two components of money supply. [CBSE Sample Paper 2010] Or
State the components of money supply. Or [CBSE 2010]
What is included in money supply?[CBSE 2010C, 2011]
Ans:Currency notes and coins with public + demand deposits with the banks.

9. Define demand deposits.[CBSE 2013, Set I, HOTS ]

Ans: Demand deposits are those deposit which can be withdrawn by the depositor at
any time by means of cheque. No interest is paid on such deposits.

10. What are time deposits in banks?[AI 2013, C Set I]

Ans: Time deposits are the deposits which can not be withdrawn before the expiry of
the stipulated time for which deposits are made. Fixed deposit is an example of time
deposit.

11. State the components of supply of money. [AT 2013 Set I]

Ans:

1. Coins and currency notes with public.

2. Demand deposits with banks.
II.MULTIPLE CHOICE QUESTIONS(1 Mark)
1. M1 in the money stock in India refers to:
(a) Post office savings deposits.
(b) Total post office deposits.
(c) Currency plus demand deposits plus other deposits with the RBI.
(d) Time deposits with banks.
Ans:(c)

2. Narrow money refers to:

(a) M1 (b) M2
(c) M3 (d) M4
Ans: (a)

3. Broad money refers to:

(a) M1 (b) M2
(c) M3 (d) M4
Ans: (c)

4. The basic distinction between narrow and broad money is the

(a) treatment of post office deposits
(b) treatment of time deposits of banks
(c) treatment of savings deposits of banks
(d) treatment of currency
Ans:(b)

5
5. Read the following dialogue between two people:
Sita : I want 1 kg of potatoes
Rani : What will you give in exchange?
Sita : I can give you 2 litres of milk in return for the potatoes.
Rani: I don’t need milk. I want a pair of shoe
Which of the following problems is being faced by Sita and Rani in their exchange
process?
(a) Lack of double coincidence of wants
(b) Absence of common units of value
(c) Lack of store of value
(d) Lackl of standard of deferred payment.
Ans: (a)

6. Which of the following agency is responsible for issuing ? 1 currency note in

India?[CBSE Sample Paper 2016]
(a) Reserve Bank of India
(b) Ministry of Commerce
(c) Ministry of finance
(d) Niti Aayog
Ans:(c)

III. SHORT ANSWER TYPE QUESTIONS [3-4 Marks]

1. Explain the ‘medium of exchange’ function of money.[CBSE Delhi 2014, AI
2013]
Ans:

1. Money when used as a medium of exchange helps to eliminate

the basic limitation of barter trade, that is, the lack of double
coincidence of wants.
2. Individuals can exchange their goods and services for money and
then can use this money to buy other goods and services
according to their needs and convenience.
3. Thus, the process of exchange shall have two parts: a sale and a
purchase.
4. The ease at which money is converted into other goods and
services is called “liquidity of money”.
2. Explain the ‘ Unit of account’ function of money. [CBSE 2004C; AI 2007]
Ans:

1. Another important function of money is that it serves as a

common measure of value or a unit of account.

6
 2. Under barter economy there was no common measure of value in
which the values of different goods could be measured and
compared with each other. Money has also solved this difficulty.
3. As Geoffrey Crowther puts it, “Money acts as a standard measure
of value to which all other things can be compared.” Money
measures the value of economic goods.
4. Money works as a common denominator into which the values of
all goods and services are expressed.
5. When we express the values of a commodity in terms of money, it
is called price and by knowing prices of the various commodities,
it is easy to calculate exchange ratios between them.
3. Explain Standard of deferred payments function of money.[CBSE Delhi 2004 C,
2007, 2012, Sample Paper 2013]
Ans:

1. Credit has become the life and blood of a modem capitalist

economy.
2. In millions of transactions, instant payments are not made.
3. The debtors make a promise that they will make payments on
some future date. In those situations money acts as a standard of
deferred payments.
4. It has become possible because money has general acceptability,
its value is stable, it is durable and homogeneous.
4. Explain Store of value function of money.[CBSE 2006, 2006C, 2007; AI 2007,
2013 C, Sample Paper 2013]
Ans:

1. Wealth can be conveniently stored in the form of money. Money

can be stored without loss in value.
2. Savings are secured and can be used whenever there is a need.
3. In this way, money acts as a bridge between the present and the
future.
4. Money means goods and services. Thus, money serves as a
store of value.
5. It is also known as asset function of money.

7
5. Explain the problem of double coincidence of wants faced under barter system.
How has money solved it? [CBSE 2013 (Set-I)]
Ans:

1. Under barter system, there is lack of double coincidence of

wants.
2. With money as a medium exchange individuals can exchange
their goods and services for money and then use this money to
buy other goods and services according to their needs and
conveniences.
3. A buyer can buy goods through money and a seller can sell
goods for money.
IV.TRUE OR FALSE
Giving reasons, state whether the following statements are true or false.
1. Standard of deferred payments led to capital formation and economic
development of the economy.
Ans: True. It is so because credit has become the life and blood of a modem capitalist
economy that leads to economic development of the country.

2. Measure of value function has removed the difficulty of lack of double

coincidence of wants.
Ans: False. Medium of exchange function has removed the difficulty of lack of double
coincidence of wants.

3. Store of value function of money facilitates transfer of purchasing power from

present to future.
Ans: True. It facilitates transfer of purchasing power from present to future.

4. Money supply is a stock concept.

Ans: True. Money supply is a ‘stock concept’ as it is measured at a particular point of
time.

5. M1 includes time deposits of commercial banks.

Ans: False. M1 includes currency notes and coins, demand deposits of commercial and
cooperative banks and other deposits. Time deposit is a component of M3.

6. Money supply does not include money held by government and banking
system.
Ans: True. As money held by them do not come into actual circulation in the country.

7. Lack of double coincidence of wants exists in barter exchange difficulty in

simultaneous fulfilment of mutual wants of buyers and sellers.

8
Ans: True. It exists under barter exchange because of difficulty in simultaneous
fulfilment of mutual wants of buyers and sellers.
Note: As per CBSE guidelines, no marks will be given if reason to the answer is not
explained.

V. HIGHER ORDER THINKING SKILLS

1. Define high-powered money. [ 1 Mark]
Ans: High-powered money is money produced by the RBI and the government. It
consists of two things:

1. Currency held by the public and

2. Cash reserves with the banks.
2. What are other deposit measures of M1? [1 Mark]
Ans: Other deposits are the deposits held by the RBI of all economic units except the
government and banks. OD includes demand deposits of semi-government public
financial institutions (like IDBI, IFCI, etc.), foreign central banks and governments, the
International Monetary Fund, the World Bank, etc.

3. Why post office saving are less liquid than demand deposits? [1 Mark]
Ans: Post office saving banks are not as liquid as demand deposits with the banks
(commercial or cooperative) as they are not chequeable account. However, saving
deposits with post offices are more liquid than time deposits with the banks.

4. Explain why time deposits measures of M3 is less liquid than the demand
deposits measure of Mr [3 Marks]
Ans:

1. It is generally thought that time deposits with the banks are not
as liquid as demand deposits, because the time deposits are not
chequeable (i.e., these cannot be withdrawn through cheques
drawn on them).
2. However, loans against these time deposits can be easily taken.
Hence, they can be used in times of need.
3. Moreover, they can also be withdrawn at any time by forgoing
some interest earned on them.
5. What are the characteristics or features of money? [3 Marks]
Ans:

9
 1. Durability: Money must be durable and not likely to deteriorate
rapidly with frequent handling. Currency notes and coins are
being used repeatedly and shall continue to do so for many years.
2. Medium of exchange: Money is the thing that acts as a medium
of exchange for the sale and purchase of goods and services.
3. Weight: Money must be light in weight. Paper money is better
than metal coins because it is light in weight.
4. Measure of value: It not only serves as medium of exchange but
also acts as a measure of value. The value of all the goods
and services is expressed in terms of money. [ 1 Mark]
1. Why is the use of money more convenient for exchange
than barter system? Explain. [3 Marks]
Ans:

1. Medium of Exchange
2. Store of Value
3. Standard of deferred payment Value: Empathy
2. Why do all the compensations in form of money than toys more convenient to
an employee working in a toy manufacturing factory? [1 Mark]
Ans: There is lack of general acceptability in case of toys, while in the case of money
there is general acceptability; so, he can purchase any goods and services with the help
of money at any point of time and he does not have to face any problem of lack of
double coincidence of wants.

10