These Money and Banking Class 12 Notes explain the meaning, functions and importance of money in a modern economy along with the role of banks and the Reserve Bank of India. The chapter discusses barter system, money supply, credit creation, money multiplier and monetary policy instruments used by RBI.
These NCERT notes are prepared for quick revision and competitive exam preparation, covering important concepts, formulas, banking systems, monetary tools and exam-oriented topics useful for UPSC, SSC, State PSC, Railways, CUET and board examinations.
Money and Banking explains how money acts as a medium of exchange, store of value and unit of account in the economy. The chapter highlights the evolution from barter system to modern banking and digital transactions. (Pages 36–37)
The chapter further explains demand and supply of money, functions of commercial banks, role of RBI, money creation process, money multiplier and monetary policy instruments such as CRR, repo rate and open market operations. (Pages 38–49)
These NCERT Notes on Money and Banking explain the concept of money and its importance in facilitating exchange in modern economies.
Money is the commonly accepted medium of exchange.
Exchange of goods and services without using money.
These notes explain the major functions performed by money in an economy.
Money facilitates buying and selling of goods and services.
Money measures value of goods and services.
Money can be saved and used in future.
These notes explain the growing importance of digital payments and financial inclusion in India.
These NCERT notes explain the factors determining the demand for money in the economy.
Demand for money refers to the desire to hold money balances.
These notes explain the meaning and components of money supply.
These notes explain the role and functions of the Reserve Bank of India.
1935
Currency issued by RBI used as base for credit creation.
These NCERT notes explain the role and functioning of commercial banks in the economy.
Difference between:
This difference is called spread.
These notes explain how banks create money through lending and deposit creation.
Assets = Reserves + Loans
Liabilities = Deposits
Net Worth = Assets − Liabilities
M1 = Currency + Deposits
These notes explain the reserve requirement maintained by commercial banks.
Percentage of deposits banks must keep as reserves with RBI.
CRR = (Cash Reserves / Deposits) × 100
Banks must maintain some reserves in liquid assets.
These NCERT notes explain how an initial deposit leads to multiple credit creation in the banking system.
Money Multiplier = 1 / CRR
If CRR = 20%
Money Multiplier = 1 / 0.20 = 5
Thus:
These notes explain the quantitative and qualitative tools used by RBI to control money supply.
Buying and selling government securities in open market.
Rate at which RBI lends money to commercial banks.
Rate at which RBI borrows money from commercial banks.
Rate charged by RBI on loans to commercial banks.
These NCERT notes explain transaction demand and speculative demand for money.
Money held for day-to-day transactions.
MdT = kT
Where:
v = 1 / k
Where:
MdT = kPY
Where:
Transaction demand for money is positively related to:
These notes explain demand for money as an alternative to holding bonds.
Speculative demand for money is inversely related to rate of interest.
Bond price and market rate of interest are inversely related.
MdS = (rmax − r) / (r − rmin)
Where:
Situation where people hold money instead of bonds due to very low interest rates.
Speculative demand for money becomes infinitely elastic.
Md = MdT + MdS
or
Md = kPY + (rmax − r) / (r − rmin)
These notes explain different measures of money supply used in India.
M1 = CU + DD
Where:
M2 = M1 + Savings Deposits with Post Office Savings Banks
M3 = M1 + Net Time Deposits of Commercial Banks
M4 = M3 + Total Deposits with Post Office Savings Organisations
| Basis | Narrow Money | Broad Money |
|---|---|---|
| Liquidity | Highly liquid | Less liquid |
| Includes | Currency + demand deposits | Includes time deposits |
| Measures | M1, M2 | M3, M4 |
These notes explain the legal nature of currency notes and coins.
Money having value because government declares it acceptable.
Money that cannot legally be refused for payments.
These notes explain the 2016 demonetisation initiative in India.
Withdrawal of legal tender status of old ₹500 and ₹1000 notes.
| Important Topic | Page Reference |
|---|---|
| Meaning of Money | Pages 36–37 |
| Functions of Money | Pages 36–37 |
| Demand for Money | Page 37 |
| Supply of Money | Pages 38–39 |
| Reserve Bank of India | Page 38 |
| Commercial Banks | Pages 38–39 |
| Credit Creation | Pages 39–42 |
| Money Multiplier | Pages 41–42 |
| Open Market Operations | Pages 42–43 |
| Repo and Reverse Repo Rate | Pages 42–43 |
| Transaction Demand for Money | Pages 43–44 |
| Speculative Demand for Money | Pages 45–47 |
| Liquidity Trap | Page 47 |
| Measures of Money Supply | Pages 47–48 |
| Fiat Money | Page 48 |
| Demonetisation | Page 49 |
Introduction to Macroeconomics Class 12 Notes
National Income Accounting Class 12 Notes
Determination of Income and Employment Class 12 Notes
Government Budget and the Economy Class 12 Notes
Class 12 Economics Chapter 6: Open Economy Macroeconomics Notes
Money is a commonly accepted medium of exchange.
Money acts as medium of exchange, unit of account and store of value.
Money multiplier shows how initial reserves create multiple deposits in banking system.
Money Multiplier = 1 / CRR
Cash Reserve Ratio is the percentage of deposits banks must keep with RBI.
Liquidity trap is a situation where people prefer holding money instead of bonds due to very low interest rates.