Class 12 Economics - HARYANA
Money and Banking
The Chapter 'Money and Banking' in Class 12 Economics for Haryana (BSEH) board students explores the evolution and definition of money, along with the crucial functions of commercial banks and the central bank (Reserve Bank of India). You will learn how money resolves the limitations of the barter system, how commercial banks create credit through deposits, and the various quantitative and qualitative instruments used by the central bank to control money supply. This chapter carries significant weight in the board examinations, testing both your conceptual understanding and numerical ability regarding credit creation and money multipliers.
Start Learning FreeKey Concepts
Barter System and Double Coincidence of Wants
The exchange of goods for goods without the use of money, which requires the simultaneous fulfillment of mutual wants between buyers and sellers.
Money Supply
The total volume of money held by the public at a particular point of time in an economy, typically measured using components like M1, M2, M3, and M4.
Credit Creation by Commercial Banks
The process by which commercial banks expand their demand deposits multiple times based on their initial cash reserves and the legal reserve ratio.
Central Bank
The apex institution of a country's monetary system, such as the RBI, responsible for regulating money supply, issuing currency, and acting as a banker to the government and banks.
Repo Rate and Reverse Repo Rate
Repo rate is the interest rate at which the central bank lends short-term funds to commercial banks, while reverse repo rate is the rate at which it borrows from them.
Important Formulas
Board Exam Info
In the Haryana Board (BSEH) Class 12 Economics exam, this chapter typically carries around 6 to 8 marks. Questions usually include 1-mark objective/MCQ questions, short-answer questions defining monetary tools, and numerical problems based on credit creation and money multiplier.
Frequently Asked Questions
What is the main difference between a commercial bank and a central bank?
Commercial banks aim to earn profit by accepting deposits and granting loans to the general public, whereas the central bank is the apex institution that regulates the entire banking system, controls money supply, and does not deal directly with the general public.
How does the central bank control inflation using the Repo Rate?
To control inflation, the central bank increases the repo rate, making borrowings expensive for commercial banks. This raises lending rates for the public, reducing borrowing, spending, and money supply in the economy.
What is Legal Reserve Ratio (LRR)?
LRR is the minimum fraction of total deposits that commercial banks are legally required to keep as cash reserves, consisting of the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
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