Class 12 Economics - ODISHA
Money and Banking
The 'Money and Banking' chapter in Class 12 Economics under the Odisha (BSE) curriculum explores the evolution and functions of money, the mechanism of money supply, and the pivotal role of commercial banks and the central bank (Reserve Bank of India). Students will learn how money overcomes the limitations of the barter system, how commercial banks create credit through the money multiplier process, and the quantitative and qualitative tools used by the central bank to control money supply and inflation. This is a high-scoring, conceptual chapter that frequently features numerical problems on credit creation and money multiplier in board exams.
Start Learning FreeKey Concepts
Barter System and Double Coincidence of Wants
The system of exchange where goods are traded directly for goods, which requires both parties to want what the other has to offer.
Functions of Money
Money serves four primary functions: medium of exchange, measure of value, standard of deferred payments, and store of value.
Money Supply
The total stock of money held by the public at a particular point of time in an economy, measured using aggregates like M1, M2, M3, and M4.
Commercial Banks and Credit Creation
Financial institutions that accept deposits and advance loans, creating credit in the economy through the process of secondary deposits.
Central Bank and Monetary Policy
The apex institution (RBI) that regulates the country's monetary system using tools like Repo Rate, Reverse Repo Rate, CRR, and SLR to control money supply.
Money Multiplier
The ratio of total money supply to the initial stock of high-powered money, inversely related to the legal reserve ratio.
Important Formulas
Board Exam Info
This chapter typically carries around 8 to 12 marks in the Odisha (BSE) Class 12 Economics board examination. Questions usually include short-answer conceptual questions about the functions of money, long-answer descriptive questions on central bank monetary policy tools, and numerical problems based on the money multiplier and credit creation process.
Frequently Asked Questions
What is the main difference between a central bank and a commercial bank?
A commercial bank deals with the general public to accept deposits and grant loans for profit, whereas the central bank (RBI) is the apex institution that regulates the entire banking system, issues currency, and controls the country's money supply.
How does an increase in the Legal Reserve Ratio (LRR) affect the money supply?
An increase in LRR reduces the lending capacity of commercial banks, which decreases the value of the money multiplier and ultimately leads to a contraction of money supply in the economy.
Are demand deposits included in the definition of money supply?
Yes, demand deposits held by the public in commercial banks are included in M1 and M3 measures of money supply because they can be withdrawn anytime using cheques or digital modes, acting just like currency.
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