Class 12 Economics - MAHARASHTRA
Money and Banking
The 'Money and Banking' chapter in Class 12 Economics for Maharashtra State Board (MSBSHSE) explores the evolution, meaning, and functions of money, alongside the crucial role played by commercial banks and the central bank in an economy. Students will learn about the barter system's difficulties, definitions of money by various economists, and how commercial banks create credit. It also covers the quantitative and qualitative credit control measures implemented by the Reserve Bank of India (RBI). This chapter is vital for board exams as it forms the foundational building block for macroeconomics.
Start Learning FreeKey Concepts
Barter System
A system of exchange where goods are directly exchanged for other goods without the use of money, which suffered from major limitations like lack of double coincidence of wants.
Functions of Money
Categorized into primary (medium of exchange, measure of value), secondary (standard of deferred payments, store of value, transfer of value), and contingent functions.
Commercial Bank
A financial institution that accepts deposits from the public and grants loans to create credit, operating primarily to earn profit.
Credit Creation
The process by which commercial banks multiply the initial deposits into a much larger volume of credit with the help of the legal reserve ratio (LRR).
Central Bank (RBI)
The apex institution of a country's monetary system that controls currency issue, acts as a banker to the government, and regulates the money supply through monetary policy.
Credit Control Measures
Tools used by the Central Bank to regulate the money supply, divided into quantitative measures (Repo Rate, Bank Rate, OMO, LRR) and qualitative measures (margin requirements, moral suasion).
Important Formulas
Board Exam Info
In the Maharashtra (MSBSHSE) Class 12 Economics board exam, this chapter typically carries around 8 to 10 marks (including options). Common question types include distinction between commercial banks and central banks, functions of money, and explanation of credit control measures through objective, short answer, and long answer formats.
Frequently Asked Questions
What is the difference between primary and secondary functions of money?
Primary functions are the main essentials (medium of exchange and measure of value), while secondary functions (store of value, standard of deferred payments) support advanced economic transactions.
How do commercial banks create credit?
Commercial banks create credit by accepting primary deposits, keeping a fraction of it as reserves (LRR), and lending out the remaining balance to borrowers. This money flows back into the banking system as derivative deposits, multiplying the total credit.
What is the difference between Repo Rate and Bank Rate?
Repo rate is the rate at which the central bank lends short-term funds to commercial banks against securities, whereas Bank rate is the rate charged for long-term funds without collateral or through rediscounting bills of exchange.
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