1. What is barter?
Ans: Barter is the direct exchange of commodities against commodities.
2. What leads to barter?
Ans: Inter - dependence of individuals leads to barter.
3. Explain barter system with an example.
Ans: Barter is the direct exchange of commodities against commodities.
For example, individual A produces rice but does not produce sugarcane. Individual B produces sugarcane but does not produce rice. So , individual A depends on B for sugarcane and individual B depends on A for rice. There is direct exchange of the two commodities, rice and sugarcane, between A and B. This is called as barter system.
4. What are the disadvantages of barter system?
Ans: The disadvantages of barter system are as follows:
a) The barter system does not work when there is lack of double coincidence of wants.
b) The barter system lacks a common unit of account.
c) Thirdly ,the barter ceases to operate when commodities are indivisible.
d) Fourthly, the barter system lacks a store of value of goods and services.
5. Write about the evolution of money in briefly.
Ans: We know that money has not developed overnight. It has certain process. There are five stages in the evolution of money. They are -
a) Barter system : Barter system was the first stage in the evolution of money. Generally, there was no use of money in the barter system.But there was commodity money as commodities act as the medium of exchange in that system. However, the barter broke down because of its inherent deficiencies.
b) Animal Standard: Animal standard is considered as the second stage of the evolution of money. In this stage animals , particularly goats were used as medium of exchange . But this system also broke down due to some difficulties.
c) Metallic Standard: The third stage in the evolution of money is metallic standard. Gold and silver were used as money. However, metallic standard also ran into several problems .
d) Coinage: Coinage stage is considered as the fourth stage in the evolution of money. In this stage, Gold and silver coins were minted out of the gold and silver bars. But this stage has also some problems.
e) Paper money : Paper money heralded the fifth stage in the evolution of money. It has evolved out of two stages.
In stage one , paper money was convertible into gold or silver of equivalent value. It is called convertible or representative paper money.
In stage two, paper money itself came to be accepted as money. It was no longer a claim against gold or silver. This paper money is called inconvertible or non- representative paper money.
Today's paper money comes under this category.
6. Write three disadvantages of animal standard in the evolution of money.
Ans: The three disadvantages of animal standard in the evolution of money are -
a) The animal used as medium of exchange was not homogenous. Some animals were healthy, some sickly , some white , some black and so on that it was a problem of choice for the users.
b) During epidemics goats die in large numbers which would mean a sharp reduction in the supply of money, goat being money and money being goat.
c) Indivisibility is another limitation of animal standard.
7. Write two problems of metallic standard of money.
Ans: The metallic standard of money has following two problems -
a) Everytime there was a transaction it was necessary to ascertain whether it was real gold and silver or fake gold and silver.
b) It was not considered to be safe to carry valuable metals from one place to another because of the security risk.
8. Write two problems of coinage system of the evolution of money.
Ans: The coinage system of the evolution of money has following two problems -
a) Unless there was an increase in the supply of gold and silver it was not possible to increase the number of coins.
b) As trade and commerce begun to spread far and wide , it became inconvenient to carry large amounts of such coins from one place to another.
9. What is money?
Ans: According to Geoffrey Crowther anything that is generally acceptable as a medium of exchange is money.
10. What are the main characteristics of money?
Ans: The main characteristics of money are as follows:
1. Money must have general acceptability: Money must be acceptable as a medium of exchange.
2.Money must have cognizability : There should be absolutely no difficulty in identifying money. If money is not easily recognisable, transactions will naturally be problematic.
3.Money must have durability: Fish, egg, milk etc. can not be a money. Because these are perishable commodities. If money is perishable, money cannot be stored up. In that case, there will be no store of value. Saving will be impossible.
4. Money must have homogeneity: In other words, money of equivalent value must be identical in all respects. If one ten rupee note is like a ribbon in size and another is as big as the size of a register book, there will be problems of selection and rejection. The bigger one may be rejected and the smaller one accepted. Therefore, all ten rupee notes must be perfectly identical in all respects. Similarly for money of other denominations.
5. Money must have liquidity: Liquidity of money means direct and immediate convertibility of money into goods and services that the holder of money wants. In fact, compared to other assets, the degree of liquidity is the maximum in case of money. Land, gold, silver other assets also have liquidity but their liquidity is less than that of money as these are not directly and immediately convertible into goods and services. For example, a plot of land cannot be instantly converted into goods and services. The plot of land has to be sold out and the money earned will be used to buy goods and services. Same is the case with gold, silver and other assets. The case is different with money.
6. Money must have transferability. The volume of trade and commerce is expanding over time. The area of the market is being extended. It will be difficult to settle transactions, if money lacks transferability. In today's monetary and banking system it is not even necessary to physically transfer money to settle transactions. Payment may be made through adjustment of bank accounts. Credit cards and debit cards are being increasingly used to settle transactions. Core banking facilities or on-line payment may also be made to settle transactions.
7. Money must have divisibility. High value money may be converted into low value money. There is money to settle transactions of all values, high or low. Lack of divisibility of commodity money was another major problem of the barter system. Money can settle a transaction of 50 paise or a transaction of 50 crore.
8. Money must have stability of value. If the value of money continues to fall all the time, money will fail to act as the store of value. In Germany when the value of money fell sharply or the price level rose quite rapidly, people eventually refused to accept German money and a new currency had to be introduced.
It is to be noted that the characteristics of money are not substitutes for one another. Money must have all the characteristics simultaneously.
11. What are the main functions of money?
Ans: Money is a matter of functions four - a medium, a measure, a standard and a store.
a) Money performs the function of a medium of exchange: In a money economy, commodities are indirectly exchanged through money. Thus, money becomes the medium of exchange.
b) Money acts as a standard of measurement of values of goods and services: Money is the common unit of measurement. The value of all economic goods and services are expressed in prices only.
c) Money acts as a standard of deferred payments: Accounts of all deferred payments are expressed in terms of money. The transactions between the creditors and debtors similarly do not involve instantaneous payments; there are cases of deferred payments. The debtor takes the loan today but repays it later on. The account of the transaction is maintained in the form of money.
d) Money functions as the store of value: Durability is one of the characteristics of money. Value of goods and services may be stored up in the form of money. As and when the goods and services are needed, money can be easily converted into those goods and services.
The first two functions of money are known as the primary functions of money and the last two as the secondary functions of money.
12. Explain the classification of money.
Ans: In a broad sense money is of two types- money- of-account and money proper. Money-of-account is merely a concept, an abstract idea. It does not undergo a change. Money proper changes its form from time to time. What is money proper today will not remain as money proper tomorrow. Whatever is the form of money proper it will always act as money of account. Money of account is like the Office of the Prime Minister of India; money proper is like the person who happens to be the Prime Minister at any given point of time. Commodity money, animal money, metallic money and paper money were money proper at different points of time and at the same time they were also money-of-account. Independent India has seen so many personalities as Prime Ministers at different points of time but there is a common thread running through all of them - they all held the office of the Prime Minister of India!
Money proper has following different types:
(1) Commodity money: In the barter system commodity was the medium of exchange. It was both money of account and money proper. Accounts were kept in the form of commodity.
(2) Animal money: Animals were used as money, particularly goats. Goat was the medium of exchange. It was money proper as well as money of account.
(3) Metallic money: In course of time, gold and silver came to be used as the medium of exchange. It was the stage of metallic money. It was also money of account.
(4) Paper money: Paper money has replaced metallic money as it is easy to carry. Earlier on, paper money was convertible or representative paper money as it was convertible into gold or silver of equivalent value. Today's paper money, however is inconvertible or non-representative paper money as it is no longer convertible into gold or silver. It is no longer a claim against gold or silver; it is money in its own right. It is used as the medium of exchange and accounts are also maintained in the form of paper money. Thus, it is also both money of account and money proper.
(5) Legal tender money: When the general acceptability of money as a medium of exchange is supported by the law of the land it is legal tender money. Refusal to accept it as the medium will be violation of the law. Legal tender money is of two types, limited legal tender and unlimited legal tender. Limited legal tender money is money which is acceptable upto a given value of a transaction. Transactions may be low value or high value transactions. For high value transactions it will be cumbersome to use small coins. For example, a person has sold his plot of land worth Rs. 10 lakh. If the buyer of the plot of land pays Rs. 10 lakh all in small coins, the transaction will be too cumbersome. On the other hand, unlimited legal tender money is money which can be used as a medium of exchange for transactions of any value- Rs. 10 lakh, Rs. 10 crore, Rs. 100 crore and so on. Whether limited or unlimited, legal tender money is both money proper and money of account.
(6) Non-legal tender money: When the general acceptability of money as a medium of exchange has no legal support it becomes nonlegal tender money. Refusal to accept this money will not mean any violation of the law of the land. (for example, cheque money).
(7) Fiat money: Fiat means the authority or the power of the state. Money supported by the fiat of the state is fiat money. Like all other types of money it is money proper and also money of account.
(8) Token money: When the face value or written value or embossed value of money is higher than its intrinsic or metallic value, it becomes token money. For example, take a hundred rupee note. The word hundred is written on that currency. That is the face value. The currency is made of paper. The value of the paper used is much less than the written value. It is token money. Similarly, take a five rupee coin. The word five is embosed on the coin. But the value of the metal out of which the coin has been made is much less. It's also an example of token money. The money that we are using today are all examples of token money.
(9) Cheque money: A cheque is not legal tender money. An individual may refuse to accept payment in cheque. There is no violation of the law of the land. A cheque is a claim against money. A cheque is encashed at the counter of the bank. Although cheque is not money yet the fact remains that cheque is being increasingly used as a means of payment not only in the developed but also in the developing countries.
(10) Standard money: Standard money is a unit of money. The value of other units of money are related to it. In India, the Rupee is the standard money. One paise is a unit and it is one percent of 100 paise.
(11) Hot money: Money that goes out of the country in the face of socio-economic disorder and uncertainty in the country is hot money. It is affected by speculation. It is money on the wings. It is also known as nervous money.
(12) Dear money: Dear money results from central banking action. When for example, India's Central Bank, the Reserve Bank of India (RBI) raises its rate of interest the member banks will borrow less from the RBI. In their turn, the member banks will raise their rates of interest as a result of which the borrowers will borrow less from the member banks. Money thus becomes dearer. It is the dear money policy.
(13) Easy or cheap money: When the Central Bank reduces the interest rate the member banks borrow more from the Central Bank and lend more to their borrowers. Money thus becomes cheaper. It is cheap money policy.
(14) Black money: Black money is not a distinct type of money. Any money can become black money when it is generated through economic offence. For example, tax evasion is an economic offence. Let us suppose that after all deductions and rebates from his gross annual income an individual has to pay income tax of 5 lakh (taxable income). But, the individual manipulates his tax statement in such a way that his taxable income is shown as 1 lakh. Therefore, the amount of money which should have gone to the Government Treasury, (i.e. 5-1) 4 lakhs, stays with the individual. This amount of money is black money or unaccounted money. It is the product of an economic offence.
(15) High power money: Out of the total money supply in the country that part which is under the direct control of the country's Central Bank is high-power money. By means of this money the Central Bank can increase or decrease the money supply in the country.
13 . Explain the role of money.
Ans: Money has played a significant role in the economy. They are as follows:
1. Money makes exchange easier. It has removed the difficulties of the barter system.
2. The price system is an important characteristic of a market centered or even a market friendly economy. The price system is dependent on the supply of money. [A market centred economy is one where the demand and supply forces determine the output and the price of commodities and services.]
3. Even in a system where the administrative decisions of the government determine the price and output of commodities and services, and not their demand and supply, the value of output in that system is expressed in terms of money. Without money, no economic system can operate.
14. What are the drawbacks of money?
Ans: Money has important role in different economic activities. But it has some drawbacks. They are as follows:
1. When money lacks stability of value, a number of problems will arise in the economy.
2. Money may be used as one of the instruments to facilitate the concentration of economic power and wealth. In an economy where money is everything money can easily become a means to acquire economic power.
3. Weakness for money may well be the cause of the erosion of the social value system. Corruption, irregularities, injustice of all types are the end results of degrading values.
4. When money takes the form of black money, the economy suffers in many different ways. For instance, the government loses considerable amount of revenue due to large scale tax evasion.
15. What is a bank ?
Ans: Bank is a financial institution that deals in loans . It collects the savings from savers and offers these savings , baring a small part , to the borrowers .
16. Name the first bank of India?
Ans: The Bank of Hindustan.( Set up in 1770)
17. Name the first bank of Assam.
Ans: Gauhati Bank .( Set up in 1926).
18. What are the different types of Banks?
Ans: There are different types of Banks. They are :
(i) The Central Bank,
(ii) The Commercial Bank,
iii) Regional Rural Banks (RRB),
(iv) Industrial Development Bank of India (IDBI),
(v) Small Industries Development Bank of India (SIDBI) and
(vi) National Bank for Agriculture and Rural Development (NABARD).
Besides these banks there are many other banks like Asian Development Bank, the World Bank and on.
19. Name the world 's oldest Central Bank.
Ans: Risksbank of Sweden.( Set up in 1656).
20. Name the Central Bank of India.
Ans: Reserve Bank of India ( Set up in 1935).
21. What are the main functions of Central Bank?
Ans: The Central Bank performs several functions. They are as follows:
i) The Central bank issues currency. This is the monopoly right of the central bank as no other bank in the country enjoys this right.
ii) The Central bank controls the volume of credit. Credit money constitutes a big chunk of total money supply. The quantity of credit. money depends on the lending capacity of the commercial banks. The Central bank adopts credit control measures to regulate the lending capacity of the commercial banks.
(iii) The Central bank is the bankers bank. The Central bank examines the account of all the member banks. The Central bank is also the friend in need to all other banks. Whenever the banks are in a financial crisis, it is the Central bank that comes to their help.
(iv) The Central bank is the financier, advisor and agent to the government. The Central bank is the financier to the government.
(v) The Central bank is the custodian reserves of the country. Foreign exchange may flow into the country in many different ways like export earnings, foreign investment and so on. The Central bank fixes the official rate of exchange. Rate of exchange is the rate at which the currency of a country is exchanged against the currency of another country.
(vi) The Central bank functions as the clearing house of the member banks. There is inter-bank lending and borrowing. The Central bank maintains the accounts of all member banks. All transactions between the lending and borrowing banks are cleared at the Central banking leve
(vii) The Central bank has a promotional role to play. It promotes socio-economic development as it releases funds to the priority sectors in the economy (like agriculture in India). At present, priority sector lending in India has been fixed at 40 per cent of the total deposits of the bank
(viii) There are miscellaneous functions which are performed by the Central bank. The bank reviews the economic situation of the country from time to time. It supplies loans to the cooperative bank and other banks. It operates a welfare fund for educational and social purposes and so on.
22. What are the main functions of Commercial Banks ?
Ans: The functions of Commercial Banks are :
a) The commercial bank mobilises savings .
b) It offers loans. Farmers, artisans, industrialists, thelawallahs, rickshawpullers and others receive loans.
c) The commercial banks as a whole can create credit money.
d) The commercial banks also perform certain miscellancous functions. Valuable ornaments, important documents etc. may be kept in the lockers of the bank for safe custody. Some of the banks also function as the trustee of the property of the customer or depositor.
23. Write about The Industrial Development Bank of India (IDBI) .
Ans: The IDBI was set up in the year 1964. This bank has two primary functions
(a) to offer financial assistance to the industries and
(b) to develop the institutions that are related to industrial development of the country.
The bank offers direct loan to the various industries. It also offers indirect loan for industrial development. For example, the IDBI gives financial assistance to the State Financial Corporation, Industrial Development Corporation, the commercial banks and such other institutions and, in their turn, these institutions offers loan to the various industries. Thus the loan from the IDBI does not come directly to the industries but through these institutions.
Another important function of the IDBI is to offer industrial loans at concessional rate of interest to industries in the backward regions of the country.
Yet another function of the IDBI is to take the initiative in creating entrepreneurship through various training programmes.
24. Write about the Regional Rural Banks (RRBs) .
Ans: Five RRBs were set up for the first time in 1975. These banks perform two main functions:
(1) to provide loans at low rate of interest to the villagers and liberate them from the clutches of the private money lenders who charge extremely high rate of interest and
(2) to mobilise rural savings and invest these in various productive activities. In 2014, the number of RRBs in India
25. Write about the National Bank for Agriculture and Rural Development (NABARD).
Ans: NABARD was established in the year 1982. The functions performed by the Reserve Bank of India in the field of rural credit have all been transfered to NABARD. The main functions of NABARD are:
(i) NABARD is the apex financial institution among all the institutions related to investment and production in the rural areas;
(ii) NABARD streamlines the process of offering loans, monitors and evaluates the progress of various rural schemes and organises training programmes for the beneficiaries;
(iii) NABARD coordinates the various schemes for rural development initiated by the central government, the state governments, the Reserve Bank of India and so on.
26. Write about Small Industries Development Bank of India ( SIDBI) .
Ans: The Bill to set up SIDBI was passed in 1989 and SIDBI started its operations from 1990. The Headquarter of SIDBI is at Lucknow. The main functions of SIDBI are :
(i) to promote modernisation and application of improved technology in small industries; (ii) to create markets for the products of the small industries;
(iii) to create more employment opportunities in the small industries in semi-urban areas and check the migration of population from these areas to the towns and cities and
(iv) to offer financial assistance to the State Financial Corporation, Industrial Corporation, commercial banks, cooperative banks and regional rural banks so as to enable these institutions to offer loans to the small industries.
27. What are the the two differences between the banks and the NBFIs?
Ans: The differences between the banks and the NBFIs are :
First, the depositors can withdraw money from the banks through cheque; NBFI depositors cannot do that.
Secondly, in case of banks there is the Deposit Insurance Scheme to cover the risk of the depositors; NBFIs do not have such schemes.
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