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Class 12th Economic exam quick revision

........UNIT 2:- MONEY AND BANKING......
  • Meaning: Anything generally accepted as payment for goods, services, and debts.
  • Core functions
    • Medium of exchange
    • Unit of account
    • Store of value
    • Standard of deferred payment

Types of Money and Characteristics

Type of Money Example Legal Tender Use
Fiat money Currency notes and coins Yes Direct transactions
Fiduciary money Cheques, drafts No Payment by trust
Near money Fixed deposits, bonds No Convertible to money

Good money characteristics: Durable; portable; divisible; uniform; acceptable; limited supply.

Banking System Overview

Central Bank Role

  • Monopoly of note issue; banker to government and banks; lender of last resort; controls money supply through monetary policy tools; manages foreign exchange.

Commercial Banks Role

  • Accept deposits; provide loans and advances; create credit; offer agency services.

Important Policy Tools

Tool What it is Primary effect
CRR Cash Reserve Ratio % of deposits kept with RBI as cash Controls liquidity immediately
SLR Statutory Liquidity Ratio % of NDTL held as cash/gold/govt securities Controls credit and investment composition
Repo Rate Rate at which RBI lends to banks Influences borrowing cost and inflation
Reverse Repo Rate at which RBI borrows from banks Absorbs excess liquidity
OMO Open Market Operations RBI buys/sells govt securities Injects or absorbs liquidity

Credit Creation and Multipliers

  • Banks keep a fraction of deposits as reserve and lend the rest; lending is redeposited and re-lent, expanding money supply.

Key formulas using LaTeX:

  • Credit multiplier [ \text{Multiplier} = \frac{1}{\text{CRR}} ]
  • Potential total deposits [ \text{Total deposits} = \text{Initial deposit} \times \frac{1}{\text{CRR}} ]
  • Money supply identity [ M = m \cdot H ] where (m) is the money multiplier and (H) is high-powered money.

Worked example

  • If CRR = 20% then multiplier (= \frac{1}{0.20} = 5). Initial deposit ₹10,000 → potential deposits ₹50,000.

Limits to actual creation: cash leakages; excess reserves; SLR requirements; weak loan demand; RBI regulations.

Circular Flow of Income in Banking Context

  • Households deposit money in banks → banks lend to firms → firms pay wages and buy inputs → income returns to households → cycle continues.
  • RBI injects or withdraws high-powered money to influence the cycle.

Key Differences Tables

Flow versus Stock

Basis Flow Stock
Measured over A period of time A point of time
Example Income per year Wealth on 31 March
Nature Dynamic Static

Central Bank versus Commercial Bank

Attribute Central Bank Commercial Bank
Issue currency Yes No
Lender of last resort Yes No
Objective Public interest and stability Profit and services

CRR versus SLR

Attribute CRR SLR
Form Cash with RBI Cash gold government securities with bank
Purpose Immediate liquidity control Control credit and investment mix
Effectiveness Direct immediate effect Indirect effect on credit growth

Money versus Near Money

Attribute Money Near Money
Legal tender Yes No
Directly usable for transactions Yes No
Examples Currency notes Fixed deposits bonds

Quick Revision Kit and Flashpoints

  • Four functions of money: Medium exchange, unit account, store value, deferred payments.
  • RBI tools: CRR SLR Repo Reverse Repo OMO.
  • Credit multiplier: Lower CRR increases multiplier.
  • Policy signal: Repo up cools inflation; repo down stimulates growth.
  • High-powered money H: Currency in circulation plus banks’ reserves. Broad money M expands from H via multiplier.

Short Practice Questions with Answers

  1. If CRR = 10 percent what is the multiplier?
    [ \frac{1}{0.10} = 10 ]
  2. Initial deposit ₹25,000 and CRR = 5 percent. Potential total deposits?
    [ 25{,}000 \times \frac{1}{0.05} = 500{,}000 ]
  3. One reason actual deposit creation is less than potential?
    Answer: Cash leakages or banks holding excess reserves.

Tips for First Time Learners

  • Visualize steps: deposit → bank keeps reserve → lends → spending → redeposit.
  • Practice numeric CRR problems to feel multiplier changes.
  • Link tools to outcomes: ask what happens to loans when repo or CRR change.
  • Memorize short definitions and the five flashpoints in the revision kit.