Q.4. Define “Central Bank”. How does it differ from Commercial Bank? (2002-03, 07-08)
Ans. In India , Reserve Bank of India das been designated as the central bank of the country. The Reserve Bank of India control and regulates monetary, banking and credit policies of the country. It has the monopoly of issue of notes and acts as bankers to the government. It also supervises the functioning of commercial banks and provides then loan facility whenever they require. Thus, it acts as a lender of the last resort.
Difference between a Central Bank And Commercial Bank: -
(i) The central bank is the apex banking institution in the country, which controls and regulates the commercial and other banks in the country.
(ii) The central bank is generally owned and managed by the state while the commercial banks may be state or privately owned institutions.
(iii) The primary objective of a commercial bank is to earn profit or surplus, but the objective of the central bank is not to earn profit, but to stimulate the economic growth of the country and to created a stable monetary system in the economy.
(iv) The central bank is the custodian of the foreign exchange reserves of the country and is responsible for maintaining the stability of the country and is responsible for maintaining the stability of foreign exchange rates. The commercial banks deals in foreign exchange only.
(v) The central bank acts as the national claring house for all commercial banks. The central bank acts as a lender of the last resort and grants credit to the commercial banks in times of emergency. The central bank is the only authority to control the credit created by the commercial banks. But such functions are not performed by the commercial banks.
Q.5. What is money and what are its different functions? (2003-04)
Or. Give an appropriate definition of money and enumerate various functions of money.
Or. Define money and bring out the various functions of money. (2005-06)
Or. Explain the following terms in reference to money?
(i) A medium of exchange.
(ii) Storage of wealth.
(iii) Standard for father payment. (2006-07)
Or. Enumerate the various functions of money. (2007-08)
Ans. Money: -
Robertson has defined money in terms of its general acceptability. According to him, money is anything which is widely accepted in payments for goods or in discharge of other kinds of business obligations. The basic characteristic of money as “ that by the delivery of which dept- contacts and price contacts are discharged and in the shape of which the general purchasing power it held; or money is anything that is generally acceptable as a means of exchange and at the same acts as a measure and as a store of value.
Function of Money: -
Money is matter of function four-
A medium,
A measure,
A standard,
And a store.
(i) Medium of Exchange: -
Money facilitates trade by acting as the medium of exchange. Money has the quality of general acceptability and so all exchanges take place in terms of money. In prater system, it is necessary that there must double coincidence of wants. For instance, if a farmer wants cloth, he will have to find a weaver who wants food grains. But in a money economy this is not needed the former need not find a weaner to get cloth. He can get cloth with the help of money and the weaver can get food grains with the help of money with the help of money, goods can be purchased of exchange.
(ii) Measure of Value: -
Money is a measure or a standard of value. In other words, it serves as the unit in term of which the value of goods and services is measured by money. It is expressed in terms of money. Money works as a common denominator, a unit of account and a standard of measurements. It also enables to compare the value of different goods and services.
(iii) Standard of Different Payments: -
A deferred payment means payment is postponed to a standard of deferred payments because debts are expressed in terms of money with the help of money borrowing and lending are possible.
(iv) Store of Value: -
Money acts as a store of value if a person possesses a commodity he can sell it today and get the money and hold and it with him for purchasing other goods in the future. An important characteristics of money is that it is not perishable. In prater system it is difficult to store the value or purchasing power because some goods are perishable and other lose value as the time possesses.
Q.6. Discuss the principal determinants of price inflation. (03-04, 05-06)
Ans. Price inflation is affected by the following factors: -
(i) Increase in Government Expenditure: -
Public expenditure in India has shown an upward trend in India during the last five decades. For instance, it has increased from 18.6% to net, National Product (NNP) in 1960-61 to around 33% in 1980-81 and to around 40 % in 2000-21. About 45% of the government spending is on non-development activities. Due to their unproductive nature, expenditure on non-development activities increase the supply of money in the economy leading to higher demand for goods and services and inflationary price rise.
(ii) Expansion of Money Supply: -
When the supply of money increase in an economy without corresponding will arise because people are ready to pay more for the same product because of rise in their income.
(iii) Deficit Financing: -
Higher doses of deficit financing during a number of years consistently may also contribute to growth of inflationary spiral in an economy. In India, the Government resorted to deficit financing to step up the spending under the five-year plans; this has resulted in rise in prices considerably. There has also been a growth of defense and non-development expenditure in the country.
(iv) Bank Credit: -
Credit creation by banks may also arise inflationary treand in the country. In our country, benk credit has increased considerably since nationalization of 14 major commercial banks in july 1969. Since the borrowers do not necessarily use bank for investment purpose, prices are bound to rise in the country.
(v) Black Money: -
it has been alleged by some economists that existence of block money in the economy has encouraped lavish spending on consumer goods. This has contributed to the rise in prices. Some more cash as population growth over dependence on agriculture natural calamities dependence or imports and unfair practices by the monopolists are the most general determinants of price inflation.