Important Questions Class 12 Macro Economics Chapter 3

Important Questions Class 12 Macroeconomics Chapter 3

Important Questions for CBSE Class 12 Macroeconomics Chapter 3 – Money and Banking

Macroeconomics is a branch of economics that studies various economic phenomena on a much larger scale, including regional, national, and international levels.

Students can solve the Extramarks Important Questions for Class 12 Macroeconomics Chapter 3 for practice and to check their preparation level. These questions serve as a guide for students to form their answers in the CBSE board exams.

CBSE Class 12 Macroeconomics Chapter-3 Important Questions

Study Important Questions for Class 12 Macroeconomics Chapter 3 – Money and Banking

Given below are questions for Very Short, Short and Long Answer each for 1, 3 /4 and 6 marks, respectively. The set of Extramarks Important Questions for Class 12 Chapter 3 Macroeconomics can be accessed by clicking on the link below.

Very Short Answer Questions 

1 Mark

Q1. The lending rate is for

  1. a) public by the commercial banks.
  2. b) central bank by the commercial banks.
  3. c) central banks by the central bank.
  4. d) commercial banks by the government.

A1. a) Public by the commercial banks.

Q2. Open market operations are known as

  1. a) buying and selling of currency by the central bank.
  2. b) buying and selling securities by the central banks.
  3. c) buying and selling securities by commercial banks.
  4. d) buying and selling of foreign exchange by the central bank.

A2. b) Buying and selling of securities by the central banks.

Q3. The money supply is equivalent to

  1. a) money saved in a post office savings bank only.
  2. b) total stock of money held by the government.
  3. c) total stock of money circulating in an economy.
  4. d) total flow of money circulating in an economy.

A3. c) Total stock of money circulating in an economy.

Short Answer Questions 

3-4 Marks

Q1. What exactly do you mean by “high-powered money”?

A1. It is the money created by the RBI and the government, in which the general public holds the currency and banks keep cash reserves. Money differs from cash reserves in that it is composed of demand deposits, whereas cash reserves are used to generate demand deposits.

The equation is as follows:

H = C + R


H stands for High-Powered Money.

C = Public currency (paper money + coins)

R = Deposits with the RBI by the government and banks

Thus, powerful money is the sum total of money deposited with public and bank funds. The central bank is primarily responsible for its creation.

Q2. Highlight the Central Bank’s role as the controller of money supply or credit.

A2. If the Central Bank wants to regulate lending, it will raise the bank rate. As a result, market rates and other loan rates on the money market will rise. This will discourage borrowing. An increase in the bank rate will restrict credit expansion. Similarly, lowering the bank rate lowers money market lending rates, which stimulates commercial and industrial activity, necessitating more credit from banks. As a result, the amount of bank credit will grow.

Long Answer Questions 

6 Marks

Q1. Describe the primary functions of commercial banks.

A1. Commercial banks are the most important components of the banking system. A commercial bank is a for-profit financial institution that makes loans, accepts deposits, and offers other financial services such as overdrafts and electronic funds transfers. “Commercial Banks are the entities that establish short-term bans on business and create money in the process,” says J. M. Culbertson.

Commercial banks have divided their functionality into two categories: Primary and Secondary functions.

  1. Primary Functions: The term “primary functions” refers to commercial banks’ basic functions, which include:
  2. Accepting Deposits implies that commercial banks get the majority of their funding from public deposits. Deposits are classified into two types: demand deposits and time deposits. Demand deposits are those that can be withdrawn quickly by individuals without notifying the bank. Time deposits are deposits made for a specific period of time. Banks pay a higher interest rate on these deposits.
  3. Advancing Loans refer to loans made by commerical banks using public deposits to individuals and businesses. Commercial bank loans include overdrafts, cash credits, and discounting bills of exchange.
  4. Secondary Functions: In most cases, the term “secondary functions” refers to important activities performed by commercial banks. Secondary functions are classified into three types: agency functions, general utility functions, and other functions.
  5. Agency Function – Commercial banks act as agents for their customers by, among other things, collecting checks, collecting income, and paying expenses.
  6. Examples of general utility functions include providing locker facilities, issuing traveller’s checks, dealing in foreign exchange, and transferring funds.

iii. Other responsibilities include lending money to individuals and opening demand deposits, as well as electronic banking, which includes services like debit cards, credit cards, and Internet banking.

Q2. How does money solve the problems associated with the barter system?

A2. Money solves the problems associated with the barter system by the following means:

  1. Money, as a medium of exchange, solves the problem of bartering’s lack of double coincidence of wants by separating the acts of sale and purchase.
  2. In the absence of a common measure of value, money is used as a measure, unit of value, or unit of account. Money functions as a unit of account as well as a yardstick for determining the exchange value of all goods.

iii. Money as a store of value solves the problem of wealth storage that plagues barter. It increased people’s buying power.

  1. Using money as a deferred payment standard aids in overcoming the barter problem of a lack of deferred payment standards. It also helps to form contracts involving future payments.
  2. The use of money enabled people to exchange excess commodities for cash and use the cash to purchase necessities. Currency was invented during ancient wars since it was difficult to carry chickens and beans everywhere to barter exchange.
  3. Goods indivisibility was a significant issue. A serious problem of indivisibility of certain items arose during barterSome articles were difficult to divide into manageable chunks. As a result, one of the traders was forced to give up his entire, indivisible thing in exchange for the goods of the other.

vii. The difficulty of transferring wealth was a major issue at the time. The issue of transferring a person’s wealth via barter arises. It’s nearly impossible for him to find someone in another location who can trade his property or wealth when he wants to move his money, such as his house, property, or car, from one location to another.

Q3. Why is only a portion of deposits held as Cash Reserves?

A3. Banks accept deposits, but loans are distributed to lenders. As a result, banks are able to lend some of their depositors’ funds while still having enough on hand to cover daily withdrawals. It is known as the fractional-reserve banking system. Cash Reserves are a portion of bank deposits. Based on his or her experience, any seasoned banker knows two things. For starters, depositors do not all go to the bank at the same time to withdraw money, nor do they do so in full. Second, new deposits will continue to flow into banks on a daily basis.

Money and Banking Class 12 Important Questions

Money and Banking is an important topic in Macroeconomics because an economy cannot function without them. Money is a form of consideration used to settle any transaction, whereas banking is a system for trading this money. Money and banking have evolved significantly over the centuries and continue to do so.

Students will learn about money and banking in Class 12 Macroeconomics Chapter 3. It is the most important chapter in Economics, so students must thoroughly learn and practise it. These questions will assist students who find it difficult to revise the main topics of the chapter and are unsure of the types of questions they will face in the exams. These questions will also help students who want notes in the form of questions and answers save time.

Why Should Students Do Important Questions For Class 12 Macro Economics Chapter 3?

Extramarks’ Money and Banking Class 12 Important Questions will assist students in reviewing the entire chapter and learning the key facts in Question and Answer format. Subject matter experts create these questions so that students can do well in their exams, as this is one of the most important and high-scoring chapters of Class 12 Macroeconomics.

Q1-The money bound to be accepted in exchange of goods and services is called
Opt-legal tender money.||limited legal tender money.||metallic money.||legal money.
ANS-legal tender money.

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FAQs (Frequently Asked Questions)

1. What is the money supply?

The total amount of monetary assets available in an economy at any given time is referred to as the money supply. Furthermore, the desire to hold financial assets is recorded as it affects inflation, the exchange rate, the price level of goods, and the business cycle.

It also expands the money supply more slowly than average. This procedure is used to address a country’s unemployment and inflation. Bonds, GDP, flat money, demand deposits, and other factors all influence how money and supply work.

2. What is Demonetisation?

Demonetisation is the act of removing a currency unit from its status as a country’s legal tender. It has been used as a tool to stabilise the currency and combat inflation to maintain the smooth flow of the economy and trade. This is a method of replacing old money with new currency while also keeping a lid on the black and grey markets.

In 2016, the Indian government decided to demonetise the 500 and 1000 rupee notes. Without warning, Prime Minister Narendra Modi declared that two prominent currency denominations would be discontinued and replaced with the newly introduced 2000 and 500 rupee bills.

3. What are the main concepts covered in Macroeconomics?

Macroeconomics educates students about a country’s economy, monetary structural setup, economic hierarchies of how cash flows in a country, and various government ideals and policies. Foreign policies, demonetisation, banking systems, and barter systems are some of the main topics covered in Macroeconomics.

4. What is a Barter System?

The barter system is defined as an exchange system in which goods are exchanged without the use of money. Though it is an ancient system of goods exchange, it is also applicable in today’s economic setup, where the economy is exchanged without any monetary transaction. The barter system is used when the demand for two commodities is equal, which is known as a commodity coincidence.