Class 12 Economics - KERALA
Money and Banking
The chapter Money and Banking in the Class 12 Economics Kerala SCERT curriculum explores the evolution and functions of money, overcoming the barters system's limitations through the medium of exchange. It delves into the crucial role of commercial banks in credit creation and details the functions of the central bank, specifically the Reserve Bank of India (RBI), as the monetary authority. Understanding this chapter is essential for board exams as it forms the foundation of macroeconomics, frequently featuring numerical problems on money multipliers and conceptual questions on monetary policy instruments, which carry significant weight in the final examination.
Start Learning FreeKey Concepts
Barter System and Double Coincidence of Wants
The direct exchange of goods for services without money, which requires a simultaneous fulfillment of mutual wants that is extremely difficult to achieve.
Functions of Money
Money acts as a medium of exchange, a unit of account to measure value, a standard of deferred payments, and a store of value.
Money Multiplier
The process by which commercial banks create credit and expand the total money supply in the economy, determined primarily by the reserve deposit ratio.
Central Bank
The apex monetary institution of a country (such as the RBI in India) that regulates the currency, controls credit, and acts as a banker to the government and commercial banks.
Quantitative Instruments of Monetary Policy
Tools used by the central bank like Repo Rate, Reverse Repo Rate, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), and Open Market Operations to control overall money supply.
Important Formulas
Board Exam Info
In the Kerala SCERT Class 12 Economics board examination, this chapter typically carries around 8 to 12 marks. Common question types include short notes on the functions of money, differentiation between central banks and commercial banks, and numerical problems calculating credit creation or the money multiplier.
Frequently Asked Questions
What is the main difference between a central bank and a commercial bank?
A commercial bank aims to make profit by accepting deposits and giving loans to the general public, whereas the central bank (like the RBI) is the apex institution that regulates the entire banking system, issues currency, and does not deal directly with the general public.
How do commercial banks create money?
Commercial banks create money by keeping only a fraction of their total deposits as cash reserves (Legal Reserve Ratio) and lending out the remaining amount, which eventually flows back into the banking system as new deposits, setting off a multiplier chain.
What is High Powered Money?
High Powered Money (or monetary base) consists of currency held by the public and cash reserves kept by commercial banks with the central bank (vault cash plus reserves).
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