NCERT Solutions Class 12 Macro Economics Chapter 3
NCERT Solutions Class 12 Macroeconomics Chapter 3- Money and Banking
Chapter 3 in Class 12 Macroeconomics is a crucial chapter for students. It explains in detail the money and banking system in an economy. Studying these concepts is essential as it gives students a critical understanding of how money creation takes place and how banks play a crucial role in the process. Various important topics such as functions of money, demand and supply of money and policy measures to control the supply of money are also explained in detail in Chapter 3. As this chapter provides the necessary information to help students understand the further chapters better, they need to thoroughly understand the key concepts that this chapter entails. During exam preparations, tests or even self-study, the NCERT Solutions Class 12 Macroeconomics Chapter 3 provided by Extramarks can be a useful study resource to quickly go through all the essential themes provided in the NCERT texts.
Students are generally advised to read the NCERT Solutions for each chapter to grasp and apply the chapter’s contents better. Many students fail to find answers to all of the NCERT activities for various reasons. NCERT Solutions Class 12 Macroeconomics Chapter 3 was prepared by Extramarks to help students comprehend the material, formulate their answers and receive solutions that have been properly reviewed. These NCERT Solutions Class 12 Macroeconomics Chapter 3 help students understand the information that will help them perform well on exams because they were created by subject matter experts and adhere to the most recent CBSE guidelines.
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Key Topics Covered in NCERT Solutions Class 12 Macroeconomics Chapter 3
Money and Banking is a chapter that holds deep importance for the students of Class 12. The role of money is imperative and essential for an economy to function. NCERT Solutions Class 12 Macroeconomics Chapter 3 will give students an in-depth understanding of various topics regarding money and its supply in the economy.
Some key topics covered in Ncert Solutions Class 12 Macroeconomics Chapter 3 are as follows:
- Money and Its Functions
- Barter Exchange
- Demand of Money
- Motives for Holding Money
- Fiat Money
- Supply of Money
- Alternate Measures of Money Supply
- Banking System
- Money Creation by Bank
- Policy Tools to Control Money Supply
Let us now look at the detailed information on each of the above-listed subtopics in the NCERT Solutions Class 12 Macroeconomics Chapter 3:
Money and Its Functions
The most popular form of transaction is money. In a transactional economy, it acts as a unit of account that is widely acknowledged as a medium of exchange. Money can reduce transaction costs, particularly the cost of the wants double coincidence. In an economy with just one person, there can be no commodity transaction and no need for money.
Functions of Money:
- Primary functions.
- Using money as a medium of trade made it easier to buy and sell goods and services. The exchange could be scaled appropriately and was straightforward.
- The common source of value for the products was money. It was impossible to estimate an item’s importance in the barter system. But the ability to value things was only made possible by money. As a result, it acted as a measurement of worth.
2. Secondary functions:
- Money could be stored more conveniently than the products that were given in return in a barter system. Therefore, it served as a value storage.
- With the advent of money, deferred payments have become significantly simpler. Compared to the barter system, loans may be repaid significantly more effectively.
3. Contingent Functions:
- Basis of Credit
- Basis of Price Mechanism
- Maximum Profit to Producers
- Maximum Satisfaction to the Consumers
- Basis of Distribution of Income
Barter Exchange is a transaction in which one product or service is traded for another. It is the oldest kind of commerce. People and businesses exchange goods and services based on comparable costs and accurate projections. People and companies exchange goods and services based on comparable pricing and quality evaluations. Bartering on a larger scale can lead to the most efficient utilisation of resources by exchanging things in amounts that have similar worth. For economies to achieve equilibrium, where supply and demand are equal, bartering can help.
Although this kind of exchange seems to have optimal advantages, there are several disadvantages that this system of exchange entails. NCERT Solutions Class 12 Macroeconomics Chapter 3 have the following disadvantages listed for barter exchange:
- A lack of established measures for evaluating value.
- A lack of metrics of standard value.
- There is no requirement for duplication.
- Incapable of dividing.
- There are no deferred payment standards.
- Inadequate store of value.
The Demand for Money
It is known as a person’s liquidity preference, which refers to the choice to keep money in liquid form, or cash, to generate a return or as a safety measure. Inflation, income, interest rates and the future’s unpredictability all affect the desire for money. The two main drivers of money demand, transaction and speculative incentives are frequently utilised to explain how these factors affect money demand.
Motives for Holding Money
- Transaction Motive: NCERT Solutions Class 12 Macroeconomics Chapter 3 Notes describe transaction motive as the desire to hold currency quantities. A majority of transactions involve exchanging money to obtain cash. Since money is the fundamental unit of value, having money available for transactions is essential. As income rises, the overall volume of transactions in a financial system tends to increase. Due to the increased demand for money during transactions, revenue or GDP improves accordingly.
- Speculative Motive: It alludes to money that investors have set aside to profit from potential economic investment opportunities in the future. The demand for money is driven by speculation since it is believed that holding onto money is less risky than leasing it out or investing it in another asset. It speaks about money investors hold back to profit from possible business possibilities. The speculative motivation for demanding money appears when keeping it is perceived as less risky than lending it or investing it in another asset.
Fiat money is a form of money that has no intrinsic value until the government declares it to be legal tender. It serves as money that has government backing. It can be employed to pay for the acquisition of products and services.
A legal tender is a form of payment that can be used to fulfil financial obligations and is recognised by the legal system. It is a method of payment accepted by the government for the payment of all debts and financial obligations. For instance, the coins and notes used in India are accepted as legal currency.
Supply of Money
The money supply is a stock concept. It refers to the total amount of money that the people of a country have in their possession at any given time. Money supply only comprises the stock of money held by people other than money suppliers. Therefore, money supply refers to the stock of money held by the general public or individuals who demand money. Money supply excludes the stock of money held by a nation’s banking system and by the government. A nation’s banking system and government both serve as producers or providers of money. As a result, the money they own is not included in the total amount of cash in circulation.
The two main components, as mentioned in the NCERT Solutions Class 12 Macroeconomics Chapter 3, include; currency and demand deposits.
Alternate Measures of Money Supply
RBI publishes figures for four alternative money supply measures: M1, M2, M3 and M4. They are defined as follows:
- M1 = C + DD + OD
In this case, C stands for currency (paper notes and coins) that the general population has withheld, and DD speaks for demand deposits in banks. OD stands for other deposits in the RBI, which include demand deposits from public financial institutions, demand deposits from foreign central banks, and demand deposits from international financial institutions like the IMF and the World Bank, among others. Account holders may withdraw demand deposits at any time. Demand deposits are connected with current account deposits.
- M2 = M1 + Savings deposits with Post Office savings banks
- M3 = M1 + Net time deposits with commercial banks
- M4 = M3 + Total deposits with Post Office savings organisations (excluding National Savings Certificates)
M1 and M2 are also known as narrow money. At the same time, M3 and M4 are known as broad money. These metrics are listed in decreasing liquidity order. M1 is the most liquid among all and facilitates transactions the simplest, whilst M4 is the least liquid. The most often used indicator of the money supply is M3. It’s also referred to as aggregate monetary resources.
Commercial Banks: A commercial bank is a specific financial institution that manages all operations involving the deposit and withdrawal of money for the general public and the supply of loans for investments and other comparable activities. These banks are profit-making businesses that exclusively operate to turn a profit. Examples are Canara Bank and State Bank of India.
Central Bank: The central bank is seen as the highest financial institution within the banking system. It is seen as a crucial part of a nation’s financial and economic structure. The central bank is a separate organisation responsible for monitoring, controlling and stabilising the nation’s monetary and banking systems.
Money Creation by Bank
The money supply will fluctuate if the value of any of its components, such as CU, DD, or time deposits, changes. The public’s preference for holding cash balances over bank deposits impacts the money supply. The following key ratios summarise these influences on the money supply:
- Currency Deposit Ratio: The percentage of total deposits represented by the currency deposit ratio (cdr) is the amount of currency each person holds. For instance, during the holiday season, the CDR increases as people convert their deposits to cash balances to pay for extra expenditures.
2. Reserve Deposit Ratio: Banks use a portion of customers’ funds as reserves and lend the remaining funds to other investment projects. Two things make up reserve money: bank vault cash and commercial bank deposits with the RBI. The banks use this reserve to provide the cash that account holders require. The percent of total deposits that commercial banks hold as reserves are known as the reserve deposit ratio (RDR).
Policy Tools to Control Money Supply
The RBI can manage the money in the economy by enacting monetary policy. To assist the country’s economy expand and flourish, these credit policies help control inflation. So let’s look at the many tools that the RBI has available for implementing monetary policy.
- Qualitative Measures.
- Quantitative Measures.
Let us now look at the detailed explanations of the various types of qualitative and quantitative measures mentioned in the NCERT Solutions Class 12 Macroeconomics Chapter 3.
- Qualitative Measures
- Cash Reserve Ratio (CRR): The Reserve Bank of India mandates that a part of a bank’s total deposits be held with the latter as liquid cash reserves. The cash reserve ratio is one of the reference rates used to calculate the base rate. The base rate is the lowest lending rate below which banks are prohibited from making loans. The Reserve Bank of India decides the base rate. Because the rate is set, the credit market is available for both borrowing and lending.
- Statutory Liquidity Ratio (SLR): It is the reserve requirement that banks must meet before issuing credit to customers. In addition to the CRR or the Cash Reserve Ratio, banks must hold a specific proportion of their net demand and time obligations in liquid assets such as cash, gold and unencumbered securities. The statutory liquidity rate applies to market stabilisation schemes(MSS), treasury bills and dated securities issued under the market borrowing programme. Banks must report their SLR maintenance to the RBI every other Friday, and penalties must be paid if SLR is not maintained as needed.
- Bank Rate: When a country’s domestic banks borrow money, the central bank will charge them an interest rate known as a “bank rate.” The purpose of central banks’ interest rates is to maintain economic stability. Bank rates impact the interest rates at which commercial banks lend money. The cost of bank loans will rise as bank rates rise. Alternatively, the central bank may increase the bank rate to decrease liquidity.
- Liquidity Adjustment Funds: The Liquidity Adjustment Facility (LAF) is an indirect tool for monetary regulation. It regulates the movement of money through repo rates and reverse repo rates. The rate at which commercial banks and other institutions get short-term loans from the Central Bank is known as the repo rate. The rate at which the RBI stores its money with commercial banks for brief durations is known as the reverse repo rate. To govern the flow of money in the market according to the state of the economy, the RBI frequently modifies these rates.
- High-Powered Money: The public holds the currency, and the banks keep the cash reserves of this newly produced money, which the government and the RBI jointly created. It differs from money in that cash reserves are a base for creating demand deposits, whereas money is made up of demand deposits. The total commercial bank reserves and currency, which refers to the bills and coins owned by the general population, are high-powered money. High-powered money serves as the foundation for both the growth of bank deposits and the expansion of the money supply.
2. Qualitative Measures
- Open Market Operations: It refers to the open market sales and purchases of securities by and from commercial banks or the general public by the central bank. The Reserve Bank of India uses the open market operation as one of its quantitative tools to even out liquidity circumstances year-round and reduce the impact on interest and inflation rates. Changes in the bank rate, the Cash Reserve Ratio (CRR), and open market operations are a few examples of quantitative controls that restrict the amount of money in circulation.
- Bank Rate Policy: The central bank’s manipulation of the discount rate to affect the state of the economy’s credit is referred to as “bank rate policy.” The premise of the bank rate policy is that changes in the bank rate typically result in parallel changes in the money market rate, increasing or decreasing the cost of credit and affecting demand and supply.
- Moral Suasion: Moral Suasion is an informal way of monetary control. The RBI supervises the financial system because it is the nation’s central bank. If necessary, it may pressure banks to occasionally impose credit control to preserve the market’s balance of funds. Since banks frequently adhere to the policies established by the RBI, this approach is fairly successful.
NCERT Solutions Class 12 Macroeconomics Chapter 3: Exercise and Solutions
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Key Features of NCERT Solutions Class 12 Macroeconomics Chapter 3
The Extramarks-provided NCERT Solutions Class 12 Macroeconomics Chapter 3 Solutions make it simple to understand the key ideas covered in the chapter. Students can quickly review all of the key concepts discussed in class by using this resource to revise key concepts, which will help them do well on their exams.
The following are some of the essential aspects of Extramarks NCERT Solutions Class 12 Macroeconomics Chapter 3 on Money and Banking:
- Students can address end-text problems with the help of the solutions provided in the Extramarks solutions, which include full answers to the chapter questions and even example test questions to help students become well-versed in their subject areas.
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FAQs (Frequently Asked Questions)
1. Why does the rate of interest have an inverse relationship with speculative demand for money?
The demand to have money for transactions other than those required for survival is known as speculative demand for money. Money is necessary for investment. Because the market value of bonds decreases when interest rates rise, the interest rate fluctuates inversely with the market value of bonds. As a result, the demand for money for speculative purposes decreases at high-interest rates and increases at low-interest rates.
2. What will the RBI do concerning bank rates to control/decrease the money supply in the market?
The interest rate at which a country’s central bank lends money to domestic banks, frequently in the form of extremely short-term loans, is known as the “bank rate.” A technique by which central banks influence economic activity is managing the bank rate. Lower bank rates can stimulate the economy by cutting the cost of borrowing money, while higher bank rates can restrain it when inflation is out of control.
Hence to decrease or control the supply of money in the market, the RBI will increase the bank rate.