Q: Answer in detail.Explain the functions of the Central Bank.

Central bank is an apex bank that controls and regulates the entire banking system of a country. The various functions performed by the central bank are:- 1. Bank of issuing notes: Central bank has monopoly rights of issuing notes. This is called the currency authority function of central banks. All notes issued by the central bank are unlimited legal tender in the country. 2. Banker to the Government: Central bank is a banker, agent, and financial adviser to the government. It manages the account of the government, it buys and sells the securities of the government and it frames policies to regulate the money market. 3. Custodian of foreign currency: The central bank maintains a minimum reserve of international currency all the time in order to meet emergency requirements of foreign exchange and overcome adverse requirements of deficit in the balance of payments. 4. Lender of last resort: The central bank also lends money to commercial banks. When the commercial banks are facing a liquidity crunch or any type of insolvency, the central bank is the last resort to provide loans against treasury bills, government securities, and bills of exchange. 5. Maintains cash reserves of commercial banks: The central bank takes care of the cash reserves of commercial banks. Commercial banks are required to keep a certain amount of public deposits as cash reserve, with the central bank. 6. Control of credit: The central bank has power to regulate credit creation by commercial banks. The credit creation depends upon the amount of deposits, cash reserves, and rate of interest given by commercial banks. All these are directly or indirectly controlled by the central bank. Therefore, they have the power to control the amount of credit creation of commercial banks.

Q: Which of these is not a function of money?

Money refers to a common medium of exchange that is issued under the law of government and acts as a legal tender for the whole country. The functions of money can be classified into two categories: 1. Primary function: The primary function of money includes money as a medium of exchange and money as a measure of value. 2. Secondary function: The secondary function of money includes money as a store of value and money as a standard of deferred payment. Therefore, power indicator is not a function of money.

Q: Explain the function of a Central Bank as a banker to the government.

The Central Bank acts as a banker to both Central and State Governments. It carries out banking business of the government and the government keeps its cash balances on current account with the Central Bank. It issues loans and advances to the government and does buying and selling of securities on behalf of government. It also advises the government to frame monetary policy of the country to control the credit creation and money market.

Question 1

What is a barter system? What are its drawbacks?

Accepted Answer

Barter System is a system of exchange in which one commodity is exchanged for another commodity. Drawbacks of Barter Systems:1. Lack of double coincidence of wants.2. Lack of a common measure of value.3. Indivisibility of certain goods.4. Difficulty in making deferred payments.5. Difficulty in storing value.

Question 2

Answer in detail.Explain the functions of the Central Bank.

Accepted Answer

Central&#10;bank is an apex bank that controls and regulates the entire banking system of a country. The various functions performed by the central bank are:- &#10;&#10;1. Bank of issuing notes: Central bank has monopoly rights of&#10;issuing notes. This is called the currency authority function of central banks. All&#10;notes issued by the central bank are unlimited legal tender in the country.&#10;&#10;2. Banker to the Government: Central bank is a banker, agent, and&#10;financial adviser to the government. It manages the account of the government,&#10;it buys and sells the securities of the government and it frames policies to&#10;regulate the money market.&#10;&#10;3. Custodian of foreign currency: The central&#10;bank maintains a minimum reserve of international currency all the time in&#10;order to meet emergency requirements of foreign exchange and overcome adverse&#10;requirements of deficit in the balance of payments.&#10;&#10;4. Lender of&#10;last resort: The central bank also lends money to commercial banks. When&#10;the commercial banks are facing a liquidity crunch or any type of insolvency, the&#10;central bank is the last resort to provide loans against treasury bills,&#10;government securities, and bills of exchange.&#10;&#10;5. Maintains&#10;cash reserves of commercial banks: The central bank takes care of the cash&#10;reserves of commercial banks. Commercial banks are required to keep a certain&#10;amount of public deposits as cash reserve, with the central bank.&#10;&#10;6. Control of&#10;credit: The central bank has power to regulate credit creation by&#10;commercial banks. The credit creation depends upon the amount of deposits, cash&#10;reserves, and rate of interest given by commercial banks. All these are&#10;directly or indirectly controlled by the central bank. Therefore, they have the&#10;power to control the amount of credit creation of commercial banks.

Question 3

The one rupee note and coins are issued by _____________.

Accepted Answer

Reserve bank of India has the sole right to issue currency notes of various denominations except one rupee notes under Section 22 of Reserve bank of India Act. The one rupee note and coins are issued by ministry of finance and it bears the signature of Finance Secretary.

Question 4

Define money supply and explain its components.

Accepted Answer

Money supply refers to the total stock of money of all types ( currency as well as demand deposits) held by the people of a country at a given point of time. Money supply is measured in several ways which includes M1, M2, M3 and M4  measurement of money supply. Every measurement has it own definition with different components varying from most liquid to most rigid form. 1. M1= C+ DD+&#10;OD where, C: It refers to&#10;currency held by public in terms of coins and paper notes.DD: It refers demand deposits of the people with the&#10;commercial bank.&#10;&#10;&#10;&#10;&#10;&#10;&#10;&#10;OD: These&#10;includes other deposits with public financial institution, foreign central&#10;banks and international financial institution. 2. M2 =  M1+ deposits with the post office saving bank account 3. M3 = M1 + net time deposits with the commercial banks 4. M4 = M3 + Total deposits with post offices other than in the form of national saving certificate

Question 5

Which of these is not a function of money?

Accepted Answer

Money refers&#10;to a common medium of exchange that is issued under the law of government and&#10;acts as a legal tender for the whole country. The functions of money can be&#10;classified into two categories: &#10;&#10;1. Primary function: The primary function of money includes money&#10;as a medium of exchange and money as a measure of value.&#10;&#10;&#10;&#10;2. Secondary function: The secondary function of money includes&#10;money as a store of value and money as a standard of deferred payment. &#10;&#10;Therefore, power indicator is not a function of money.

Question 6

Explain the function of a Central Bank as a banker to the government.

Accepted Answer

The Central Bank acts as a banker to both&#10;Central and State Governments. It carries out banking business of the&#10;government and the government keeps its cash balances on current account with&#10;the Central Bank. It issues loans and advances to the government and does&#10;buying and selling of securities on behalf of government. It also advises the&#10;government to frame monetary policy of the country to control the credit&#10;creation and money market.

Question 7

Explain the lender of last resort' function of the Central Bank.

Accepted Answer

When a commercial bank faces financial crisis and fails to obtain funds from other sources, then the central bank plays the vital role of 'lender of last resort' and provides them with the financial assistance in the form of credit. This role of the the central bank saves the commercial bank from bankruptcy. Thus, the central bank plays the role of guarantor for the commercial banks and maintains a sound and healthy banking system in the economy.

Question 8

Which of the following is not an instrument of monetary policy?

Accepted Answer

Government spending is a fiscal policy tool because it has the power to raise or lower real GDP. By adjusting government spending, the government can influence economic output.

Question 9

Given Reasons.Barter System has many difficulties.

Accepted Answer

The various difficulties faced under the barter&#10;system of exchange. &#10;&#10;1. Lack of Double Coincidence of Wants and Exchange:&#10;Double coincidence of wants means the simultaneous fulfillment of mutual wants&#10;by buyers and sellers. When 2 persons needs goods that are in each other&#8217;s&#10;possession .There is no guarantee that such double coincidence of want will&#10;exists. For Ex., Suppose a person possesses rice and wants to exchange it for a&#10;sugar. In the barter system he has to find out a person who not only has sugar&#10;but also wants rice &#10;&#10;2. Lack of Common Measure of Value Even if the two&#10;people who want each other&#8217;s goods meet by coincidence, the problem arises in&#10;deciding the proportion in which the goods should be exchanged. There being no&#10;common measure of value, the rate of exchange will be arbitrarily fixed&#10;according to the intensity of demand for each other&#8217;s goods. One party is at a&#10;disadvantage in the terms of trade between the two goods. &#10;&#10;3. Lack of Divisibility: In the absence of a common&#10;medium of exchange, a problem arises when a big indivisible commodity is to be&#10;exchange for a smaller commodity. For example, if the price of a horse is equal&#10;to five sheep, then a person having one sheep cannot exchange it for the horse&#10;because it is not possible to divide the horse into small pieces &#10;&#10;4. Problem of Storing Wealth: The value of stored&#10;commodities may change in the due course of time. These goods may perish after&#10;some time. Secondly, it is very expensive to store specific goods for a long&#10;time. Finally the wealth stored in the form of specific goods may create&#10;jealousy and enmity among the neighbours or relatives. &#10;&#10;5. Lack of Standard of Deferred (Future) Payments:&#10;Credit transactions requiring future payments cannot take place smoothly under&#10;barter trading. There are three main problems in this context. These are&#10;&#10; a. It may&#10;create controversy regarding the quality of goods or services to be repaid in&#10;future.&#10;&#10; b. The two&#10;parties may be unable to agree on the specific good to be used for repayment. &#10;&#10;c. Both parties run the risk that the value of goods&#10;to be repaid may increase or decrease in future.

Question 10

Distinguish between 'Capital Market' and 'Money Market' on the basis of:(i) Liquidity(ii) Investment outlays(iii) Participants(iv) Safety(v) Instruments.

Accepted Answer

Basis Capital market Money market Liquidity Capital market securities are considered liquid because of stock exchange but compared to money market instruments these are less liquid. Money market securities enjoy higher degree of liquidity. Investment outlays The investment in capital market does not require huge financial investment The money market instruments are quite expensive so huge financial investment is required. Participants Thee participants of capital market are financial institutions, banks, public and private companies, foreign and ordinary retail investors from public. Thee participants of money market are banks, private and public companies but foreign and ordinary retail investors do not participate in money market. Safety The instruments of the capital market are riskier .  The instruments in the money market are safe and less risky due to short duration. Instruments The instruments dealt in this market are bonds, debentures, equity shares and stock. The instruments dealt in the market are bills of exchange, treasury bills, banker's acceptance, etc