The Core Books

Ch 3 Money and Banking

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Class 12 โ€ข Introductory Macroeconomics

NCERT Class 12 Economics Chapter 3 Questions (MCQ, One-Word or Descriptive)

This page provides complete NCERT Class 12 Introductory Macroeconomics Chapter 3 questions, including MCQs, one-word and descriptive questions. All questions are extracted line-by-line from NCERT for full syllabus coverage and exam preparation.

This chapter, Money and Banking, explains the role of money in a modern economy and how the banking system creates money. It begins by describing the barter system and its drawbacks : the most critical being the lack of double coincidence of wants. Money overcomes these limitations by serving three main functions: medium of exchange (facilitates transactions), unit of account (provides a common measure of value), and store of value (allows wealth to be preserved for future use).

The chapter then discusses the demand for money, which arises from two motives: the transaction motive (to conduct day-to-day purchases, positively related to income and price level) and the speculative motive (to avoid capital losses from falling bond prices when interest rates are expected to rise, inversely related to interest rates).

The velocity of circulation (number of times a unit of money changes hands) is introduced, along with the quantity theory relationship: v ร— Mแตˆ = T. The chapter then explains the supply of money, comprising currency (issued by RBI) and bank deposits. Commercial banks accept deposits and lend to borrowers, earning profit through the interest rate spread.

The credit creation process is illustrated through the story of Lala the goldsmith, who lent out deposited gold assuming not all depositors would withdraw at once. This process is formalised with the balance sheet of a bank (Assets = Reserves + Loans; Liabilities = Deposits). The Cash Reserve Ratio (CRR): the percentage of deposits banks must keep as reserves : acts as a limit to credit creation.

The money multiplier is 1/CRR; with CRR of 20%, Rs 100 in reserves can support Rs 500 in deposits. The RBI controls money supply through quantitative tools: changing CRR, Open Market Operations (buying/selling government bonds), and the bank rate (now mainly repo rate). Repo and reverse repo operations have become the main monetary policy tools.

The chapter also defines high-powered money (currency issued by RBI that forms the base for credit creation), the liquidity trap (where speculative demand for money becomes infinite at very low interest rates), and fiat money (legal tender with no intrinsic value). Various measures of money supply are presented: M1 (narrow money = currency + demand deposits), M2 (adds post office savings), M3 (broad money = M1 + time deposits), and M4 (includes all post office deposits).

A Box on demonetisation (November 2016) discusses its impact on black money, tax compliance, and the shift to digital payments. Tables show that India’s M3 (broad money) grew from about Rs 3.4 lakh crore in 1999-2000 to over Rs 272 lakh crore in 2024-25.

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Section A: Descriptive Questions

  1. What is a barter system? What are its drawbacks? Page 36-37
  2. What are the main functions of money? Page 36-37
  3. What is double coincidence of wants? Page 36
  4. What is transaction demand for money? Page 43-44
  5. What is the speculative motive for holding money? Page 45-46
  6. What is the velocity of circulation of money? Page 44
  7. What is a Central Bank? What are its main functions? Page 38
  8. What is a commercial bank? How does it earn profit? Page 38
  9. Explain the process of credit creation (money creation) by commercial banks using the Lala the goldsmith story. Page 38-39
  10. What is a balance sheet of a bank? What are its main components? Page 39
  11. What is Cash Reserve Ratio (CRR)? Page 40
  12. What is the Statutory Liquidity Ratio (SLR)? Page 40
  13. What is the money multiplier? Derive its formula. Page 41-42
  14. What are Open Market Operations (OMO)? Distinguish between outright and repo operations. Page 42-43
  15. What is the Bank Rate? Page 43
  16. What is a liquidity trap? Page 47
  17. What is fiat money? Why is it called legal tender? Page 47-48
  18. What are the alternative measures of money supply in India (M1, M2, M3, M4)? Page 48
  19. What is the difference between narrow money and broad money? Page 48
  20. What was demonetisation in India (November 2016)? Discuss its impact. (Box 3.2) Page 49
  21. What is high-powered money (reserve money or monetary base)? Page 38
  22. What is the relationship between bond prices and interest rates? Page 45-46
  23. What is present value of a bond? How is it calculated? Page 45

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Section B1: Objective MCQs

Page 36

Money facilitates exchanges by overcoming which major drawback of barter?

A) Lack of storageB) Lack of double coincidence of wantsC) Perishability of goodsD) High transportation cost
View Answer
Correct Answer: Lack of double coincidence of wants
Reference: NCERT Page 36
Page 36-37

Which of the following is NOT a function of money?

A) Medium of exchangeB) Unit of accountC) Store of valueD) Source of production
View Answer
Correct Answer: Source of production
Reference: NCERT Page 36-37
Page 37

When prices of all commodities increase, the value of money in terms of any commodity

A) IncreasesB) DecreasesC) Remains constantD) Becomes zero
View Answer
Correct Answer: Decreases
Reference: NCERT Page 37
Page 37

What is the purchasing power of money called when prices rise?

A) Increase in valueB) DeteriorationC) AppreciationD) Stabilisation
View Answer
Correct Answer: Deterioration
Reference: NCERT Page 37
Page 38

In which year was the Reserve Bank of India established?

A) 1935B) 1947C) 1950D) 1969
View Answer
Correct Answer: 1935
Reference: NCERT Page 38
Page 39

In the goldsmith Lala’s story, if Lala had 100 kg gold deposits and lent 25 kg gold, the effective paper receipts acting as money became

A) 100 kgB) 125 kgC) 75 kgD) 150 kg
View Answer
Correct Answer: 125 kg
Reference: NCERT Page 39
Page 40

If CRR is 20%, with deposits of Rs 100, a bank must keep reserves of

A) Rs 10B) Rs 20C) Rs 40D) Rs 80
View Answer
Correct Answer: Rs 20
Reference: NCERT Page 40
Page 41

If CRR is 20% and deposits are Rs 500, the required reserves are

A) Rs 50B) Rs 80C) Rs 100D) Rs 120
View Answer
Correct Answer: Rs 100
Reference: NCERT Page 41
Page 42

Given CRR of 20%, the money multiplier is

A) 2B) 3C) 4D) 5
View Answer
Correct Answer: 5
Reference: NCERT Page 42
Page 42

If RBI increases the reserve ratio from 20% to 25%, with Rs 100 in reserves, the maximum deposits supported become

A) Rs 500B) Rs 400C) Rs 500D) Rs 300
View Answer
Correct Answer: Rs 400 (1/0.25=4, so Rs 400)
Reference: NCERT Page 42
Page 42

When RBI buys a government bond in the open market, it pays by cheque, which

A) Decreases money supplyB) Increases money supplyC) Leaves money supply unchangedD) Reduces bank reserves
View Answer
Correct Answer: Increases money supply
Reference: NCERT Page 42
Page 42

When RBI sells a government bond, it leads to

A) Increase in money supplyB) Decrease in money supplyC) No change in money supplyD) Increase in bank reserves
View Answer
Correct Answer: Decrease in money supply
Reference: NCERT Page 42
Page 43

Repo rate is the interest rate at which

A) RBI lends to commercial banks through repurchase agreementsB) Commercial banks lend to RBIC) RBI lends to the governmentD) Banks lend to each other
View Answer
Correct Answer: RBI lends to commercial banks through repurchase agreements
Reference: NCERT Page 43
Page 43-44

In a two-person economy with firm paying Rs 100 salary and worker spending it all on firm’s output, the total transaction demand for money is

A) Rs 50B) Rs 100C) Rs 150D) Rs 200
View Answer
Correct Answer: Rs 100
Reference: NCERT Page 43-44
Page 44

In the above economy, the velocity of circulation of money is

A) 1B) 2C) 3D) 4
View Answer
Correct Answer: 2
Reference: NCERT Page 44
Page 45-46

If a bond with face value Rs 100 offers Rs 10 at end of first year and Rs 110 at end of second year, and market interest rate rises from 5% to 6%, the bond price

A) IncreasesB) DecreasesC) Remains sameD) Becomes zero
View Answer
Correct Answer: Decreases (from ~109.29 to ~107.33)
Reference: NCERT Page 45-46
Page 47

In a liquidity trap, the speculative demand for money is

A) ZeroB) InfiniteC) Equal to transaction demandD) Negative
View Answer
Correct Answer: Infinite
Reference: NCERT Page 47
Page 51

According to Table 3.4, India’s M3 (Broad Money) in 2024-25 was approximately

A) Rs 6,09,1700 croreB) Rs 12,72,86589 croreC) Rs 7,47,900 croreD) Rs 27,28,6589 crore
View Answer
Correct Answer: Rs 27,28,6589 crore
Reference: NCERT Page 51
Page 48

Which measure of money supply includes savings deposits with Post Office savings banks?

A) M1B) M2C) M3D) M4
View Answer
Correct Answer: M2
Reference: NCERT Page 48
Page 47

Currency notes in India are issued by the

A) Government of IndiaB) Reserve Bank of IndiaC) Ministry of FinanceD) Commercial banks
View Answer
Correct Answer: Reserve Bank of India
Reference: NCERT Page 47

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Section B2: Factual One-Liners

Exchange of commodities without the mediation of money is called? Page 36

Reveal Answer
Barter exchange (Page 36)

What is the term for the deterioration in the purchasing power of money due to a general increase in prices? Page 37

Reveal Answer
Inflation (or falling purchasing power) (Page 37)

What is the full form of RBI? Page 38

Reveal Answer
Reserve Bank of India (Page 38)

What is the full form of CRR? Page 40

Reveal Answer
Cash Reserve Ratio (Page 40)

What is the full form of SLR? Page 40

Reveal Answer
Statutory Liquidity Ratio (Page 40)

What is the term for deposits which commercial banks keep with the RBI? Page 39

Reveal Answer
Reserves (Page 39)

What is the formula for the money multiplier? Page 42

Reveal Answer
Money Multiplier = 1 / Cash Reserve Ratio (Page 42)

What is the term for buying and selling of government bonds by the central bank? Page 42

Reveal Answer
Open Market Operations (OMO) (Page 42)

What is the interest rate at which RBI lends to commercial banks through repurchase agreements called? Page 43

Reveal Answer
Repo rate (Page 43)

What is the interest rate at which RBI withdraws money through sale of securities with buyback agreement called? Page 43

Reveal Answer
Reverse repo rate (Page 43)

What is the term for a situation where the speculative demand for money becomes infinite? Page 47

Reveal Answer
Liquidity trap (Page 47)

What is the term for currency notes and coins that have no intrinsic value but are accepted because of government guarantee? Page 47-48

Reveal Answer
Fiat money (Page 47-48)

What is the term for money that cannot be refused by any citizen for settlement of any transaction? Page 48

Reveal Answer
Legal tender (Page 48)

What is the narrowest measure of money supply in India? Page 48

Reveal Answer
M1 (Page 48)

What is the most commonly used measure of money supply in India, also called aggregate monetary resources? Page 48

Reveal Answer
M3 (Page 48)

What is the highest measure of money supply in India? Page 48

Reveal Answer
M4 (Page 48)

What happened to old Rs 500 and Rs 1000 notes in November 2016? Page 49

Reveal Answer
Demonetisation (they ceased to be legal tender) (Page 49)

What is the term for the number of times a unit of money changes hands during a unit period? Page 44

Reveal Answer
Velocity of circulation (Page 44)

What is the average money holding of a person who earns Rs 100 on the first day of the month and runs it down evenly to zero by month end? Page 43

Reveal Answer
Rs 50 (Page 43)
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