Q.1. Discuss the role of Commercial Bank in promotion the economic growth of developing countries. (2002-03)
Ans. Role of Commercial Banks: -
Commercial banks play an indispensable role for the growth of modern business system and the economy as whole. They perform the following important services-
(i) Encourage the Habit of Thrift: -
Bank offer attractive rates of interest on deposits idle saving can earn invest if they ar deposited with banks. Thus, banks encourage the habit of thrift among people. They mobilize the savings of the society. Banks are compared to rivers, as they collect, the small surplus and scattered saving of the people and make available for productive purposes in large sums.
(ii) Channelisation of Funds into Productive Channels: -
Banks regulate the flow of national saving into various productive channels. While lending money, they discriminate between a genuine trader and a speculator and thus, they discourage the gamblers.
(iii) Credit Creation: -
Banks accept deposits, retain a normal percentage of the deposit as cash reserves and the major part is lent t trade, industry and commerce at higher rates of interest. It is known as credit creation.
(iv) Promotion of Foreign Trade: -
Finance is the life blood of foreign trade. Banks provide funds for foregn trade and also help in the payment and transfer of money, provide foreign exchange, issue letter of credit and assistance to foreign trade in many ways.
(v) Remittance of Money: -
Commercial banks provide safe means of transferring money from one place to another. The facility of cheque, demand draft, pay order, etc. is vary useful in transfer of money.
(vi) Safe Custody of Valuables: -
Commercial banks provide lockers where important; papers, documents and even ornaments could be kept, safely. There is no fear of theft, or pilferage.
(vii) Social Welfare: -
Surplus funds of the people are accepted as deposits by banks and lent to trade, commercial and industry for productive purposes. It promotes welfare of the people and improves the qualify of life by helping in the production and distribution goods and services.
Q.2. Describe the various stages in the evolution money and highlight its role in a socialist economy. (2002-03)
Ans. Various Stages in the Evolution of Money: -
Money was invented to remove the inconvenience created by barter. But for money, there would have been no capital formation in any economy. Money is the medium of exchange and a measure of all values in both the capital socialistic economics. Without the use of money, exchange of goods and services would have been made very difficult and thus the needs of the people would have remained unsatisfied. Now money is a standard measure of value of all commodities. The value of any commodity can be determined in terms of money. This has facilitated the smooth flow of trade within the country and outside the country. Money also acts as store of value.
Money makes more productivity by increasing its mobility. This is because money makes capital more liquid and on account of this liquidity, capital can be transferred to any place. With the help of money, it is possible to divert, capital from less productive use to more productive use. Money is the foundation of the credit system in any economy. It is easy to borrow and lend money and it is possible to enter into future transactions. This price may be settled in the present and the payments may be made in the future-
Money is Socialist Economy: -
Some socialist thinkers opine that socialist economy can function quite smoothly without the use of money in any manner because the entire economic activity is planned, executed and controlled by central planning commission on behalf of the state. Karl Marx considered money as the fundamental cause for the exploitation of labour by the capitalist. So he wanted to abolish the institution of money in a socialist economy. In the U.S.S.R, money was a polished after the communist revolution in 1917. But many practical difficulties wear felt by the then rules. They felt that economic calculations were necessary for the success of the 5-year plans and these calculations could be made only with the help of money.
So the use of money was restored in the economy. Lenin admitted in 1921 that it would not be possible to establish real communize in Russia without money. As a matter of fact, money virtually performs allthe function in a socialist economy, which are associated with it in a capitalist, economy, namely, a unit of account, a medium of exchange and a measure of value. In a social economy, the ownership of all the economic resources vests, the ownership of all the economic resources vests with the state. Government pays ways and salaries in terms of money. The wage corners or salaried people are free to spend their incomes on goods of their choice. Money is always considered to be a servant to achieve economic ends in a socialist economy.
Q.3. What is Inflation? Explain its economic effects on the different categories of people. (2002-03)
Ans. Meaning of Inflation: -
Inflation is generally understood as an economic process, which denotes a substantial, and rapid general increases in the level of prices and consequent deteriration in the value of money over a period of time In other words, Inflation represents a sustained rise in prices. Crow ther has value of money is falling i.e. prices are rising”. According to Edward Shapiro,” Rewgnising the ambiguities our words contain, we shall define inflation simply as a persistent and appreciable rise in the general level of prices”. Thus inflation is a sustained rise in price level over a period of time. It can be measured in terms of percentage increases in the price index as a rate percent per unit of time, say , a month or a year.
Effect of Inflation : -
Inflation affects both production and distribution of income in a country. Rising prices is not a happy situation for any country. When the country is affected by inflation, the main effect is that the richer and the poor becomes poorer. When prices in general are rising, debtors, business member and corporate shareholders enjoy an improvement.