Money and Banking NCERT Solutions Class 12 PDF 2026

Ans: The Barter System is a system of exchange where goods and services are exchanged directly for other goods and services without using money.
Drawbacks:
1. Lack of Double Coincidence of Wants: The biggest drawback. Both parties must need what the other is offering.
2. Lack of a Common Measure of Value: It's difficult to decide the exchange ratio (e.g., how many apples equal one pair of shoes?).
3. Difficulty in Storing Wealth: Goods lose value or perish over time, unlike money.
4. Lack of Standard of Deferred Payment: Future contracts and loans are difficult to settle in terms of goods.

Ans: The functions of money are classified into:
1. Primary Functions:
• Medium of Exchange: It acts as an intermediary in trade, eliminating the need for double coincidence of wants.
• Measure of Value: It acts as a common denomination to value all goods and services.
2. Secondary Functions:
• Standard of Deferred Payment: It facilitates borrowing and lending (future payments).
• Store of Value: Money can be easily saved for future use without loss of value.

Ans: The Money Multiplier (or Credit Multiplier) measures the amount of money that banks are able to create in the form of deposits with every unit of money it keeps as reserves.
It is determined by the Legal Reserve Ratio (LRR), which is the minimum fraction of deposits banks must keep as cash.
Formula: Money Multiplier = 1 / LRR.
For example, if LRR is 20% (0.2), the Money Multiplier is 1 / 0.2 = 5. This means banks can create total deposits 5 times their initial cash deposits.

Ans: The Central Bank (RBI in India) performs the following crucial functions:
1. Bank of Issue: It has the sole monopoly to issue currency notes (except ₹1 coin/note).
2. Banker to the Government: It manages government accounts, buys/sells securities on its behalf, and provides short-term loans.
3. Banker's Bank and Supervisor: It holds the cash reserves of commercial banks (CRR) and regulates their operations.
4. Lender of Last Resort: It provides financial assistance to commercial banks during emergencies.
5. Controller of Money Supply and Credit: It uses instruments like Repo Rate and CRR to control inflation or deflation.

Ans:
Fiat Money: Money backed by the order (fiat) of the government. It must be accepted by law for all debts (e.g., Currency notes and coins).
Fiduciary Money: Money backed by mutual trust between the payer and payee, not by government order (e.g., Cheques, Bills of Exchange).

Ans: LRR is the legally compulsory percentage of total deposits that a commercial bank must keep as reserves. It has two components:
1. CRR (Cash Reserve Ratio): The fraction kept with the Central Bank.
2. SLR (Statutory Liquidity Ratio): The fraction kept with the commercial bank itself in the form of liquid assets (gold, govt securities).

Ans: Demand Deposits are the deposits in bank accounts (like savings or current accounts) that can be withdrawn by the depositor on demand at any time using cheques or ATM cards.

Ans:
Repo Rate: The rate at which the Central Bank lends short-term funds to commercial banks.
Reverse Repo Rate: The rate at which commercial banks can park their surplus funds with the Central Bank.

Ans: OMO refers to the buying and selling of government securities (bonds) by the Central Bank in the open market to control the money supply. Buying securities injects money into the economy, while selling them withdraws money.

Ans: Commercial banks create credit based on the assumption that not all depositors will withdraw their money at the same time.
Process: Suppose the initial deposit is ₹1000 and the LRR is 20%.
1. Round 1: The bank keeps 20% (₹200) as reserves and lends the remaining ₹800.
2. Round 2: The ₹800 loaned out is spent and eventually deposited back into the banking system. The bank keeps 20% of ₹800 (₹160) and lends ₹640.
3. This process continues until the total reserves equal the initial deposit.
Calculation: Money Multiplier = 1/LRR = 1/0.2 = 5.
Total Credit Created = Initial Deposit × Multiplier = 1000 × 5 = ₹5000.
Thus, from ₹1000, banks created a total money supply of ₹5000.

Ans: Inflation is caused by excess money supply (excess demand).
Repo Rate/Bank Rate: These are the rates at which the RBI lends money to commercial banks. To control inflation, the RBI increases these rates.
Impact: When the RBI charges more, commercial banks increase their own lending rates for the public. Loans become expensive (cost of borrowing rises). This discourages businessmen and consumers from taking loans, which reduces investment and consumption expenditure. Consequently, aggregate demand falls, bringing inflation under control.

Ans: Qualitative instruments focus on directing credit to specific sectors rather than controlling the total volume of money.
1. Margin Requirements: It is the difference between the value of security offered and the loan granted. To restrict credit for speculative purposes, RBI increases the margin. (e.g., if margin is 40%, you get a ₹60 loan for a ₹100 asset).
2. Moral Suasion: A combination of persuasion and pressure by the RBI on commercial banks to follow its directives regarding credit policy.
3. Selective Credit Control (Rationing of Credit): RBI fixes credit quotas for different business activities to prevent the flow of credit to non-essential or speculative sectors.

Ans: Commercial banks operate on trust. Sometimes, due to panic or financial crises, a bank may face a sudden rush of withdrawals (a bank run) and fall short of cash reserves to meet depositor demands. When a commercial bank fails to get financial accommodation from anywhere else, it approaches the Central Bank. The Central Bank advances loans to the commercial bank against eligible securities. This prevents the bank from collapsing, saves depositors' money, and maintains public confidence in the banking system.

Ans: Money Supply refers to the total volume of money held by the public at a particular point in time. The most liquid measure is M1.
Components of M1:
1. C (Currency): Currency notes and coins held by the public.
2. DD (Demand Deposits): Net demand deposits held by commercial banks. These are chequable deposits.
3. OD (Other Deposits): Deposits held by the RBI on behalf of foreign central banks, governments, and international institutions like the IMF.
Time Deposits (Fixed Deposits): No, time deposits are NOT included in M1 because they have a fixed maturity period and cannot be withdrawn immediately by issuing a cheque. They are included in broader measures like M3.

Ans: During a recession, there is deficient demand. To boost growth, the RBI should decrease the CRR.
Justification: By lowering the CRR, commercial banks are required to keep less cash with the RBI. This leaves them with more surplus cash to lend to the public. As lending increases, businesses invest more and consumers spend more, which increases aggregate demand and helps the economy recover from the recession.

Ans: Both Assertion (A) and Reason (R) are True, and (R) is the correct explanation of (A).
Since Money Multiplier = 1/LRR, an increase in the denominator (LRR) mathematical decreases the multiplier. Logically, if the RBI forces banks to lock up more money as reserves, banks have less money to give out as loans, crushing the credit creation process.

Ans: They are considered legal tender because they have the legal backing of the government. No citizen or entity in the country can legally refuse to accept them in settlement of debts or transactions.

Ans:
LRR = CRR + SLR = 5% + 15% = 20% (or 0.2).
Money Multiplier = 1 / LRR = 1 / 0.2 = 5.
Total Money Created = Initial Deposit × Multiplier = 5000 × 5 = ₹25,000.

Ans: The RBI prints actual physical currency notes. Commercial banks, however, do not print physical notes. They create money via credit creation. They accept a physical deposit and give out loans by opening accounts in borrowers' names (creating Demand Deposits). Since these demand deposits serve as money in the economy, banks essentially "create" money out of thin air through the lending process.