Class 12 Economics Sample Paper (2025)
Chapter 3: Money and Banking – With Answers
Maximum Marks: 40 Time: 90 minutes
SECTION A — Objective Type Questions (1 × 10 = 10 Marks)
Q1. Money acts as a medium of exchange because it —
Answer: (a) Eliminates the need for double coincidence of wants
Q2. Which of the following is included in broad money (M3)?
Answer: (c) Demand + Time deposits with banks
Q3. High-powered money includes —
Answer: (b) Currency with the public + bank reserves
Q4. The money multiplier is —
Answer: (c) Inversely proportional to reserve ratio
Q5. Which of the following is not a function of money?
Answer: (c) Production of goods
Q6. If the Cash Reserve Ratio (CRR) is increased by RBI, the credit creation will —
Answer: (b) Decrease
Q7. Open Market Operations refer to —
Answer: (b) RBI’s purchase and sale of government securities in the open market
Q8. The value of money multiplier when reserve ratio = 0.20 will be —
Answer: (a) 5
Q9. Which of the following statements is true?
Answer: (c) M3 > M1
Q10. The main purpose of Bank Rate Policy is —
Answer: (b) To control money supply and credit in the economy
SECTION B — Short Answer Questions (3 × 4 = 12 Marks)
Q11. Explain any three functions of money.
- Medium of Exchange: Facilitates buying and selling of goods and services.
- Unit of Account: Common measure to value goods and services.
- Store of Value: Helps in transferring purchasing power from present to future.
Q12. Differentiate between high-powered money and money supply.
| Basis | High-Powered Money | Money Supply |
|---|---|---|
| Meaning | Currency + Reserves with RBI | Total money held by public |
| Control | Directly controlled by RBI | Influenced by banks & public |
| Symbol | M0 | M1, M2, M3 |
Q13. State any three determinants of demand for money.
- Transaction motive: Day-to-day spending.
- Precautionary motive: Future uncertainties.
- Speculative motive: Future investment opportunities.
Q14. Explain the process of credit creation by commercial banks with a numerical example.
If initial deposit = ₹1,000 and reserve ratio = 20%, banks keep ₹200 and lend ₹800. This ₹800 becomes a new deposit in another bank, which keeps ₹160 and lends ₹640. The process continues, leading to total deposits = ₹1,000 × (1 / 0.20) = ₹5,000. Hence, credit created = ₹4,000.
SECTION C — Long Answer Questions (6 × 3 = 18 Marks)
Q15. Define money multiplier and derive its formula. Calculate total money supply when base money = ₹5,000 crore and CRR = 10%, SLR = 10%.
Money Multiplier = 1 / Reserve Ratio = 1 / (0.10 + 0.10) = 1 / 0.20 = 5
Total Money Supply = 5 × ₹5,000 = ₹25,000 crore.
Q16. Explain policy instruments used by RBI to control the supply of money.
- Quantitative Tools: CRR, SLR, Open Market Operations, Bank Rate, Repo Rate.
- Qualitative Tools: Margin requirements, Credit rationing, Moral suasion.
Q17. Discuss the components and measures of money supply in India.
| Measure | Components | Type |
|---|---|---|
| M1 | Currency with public + Demand deposits | Narrow money |
| M2 | M1 + Savings deposits | Intermediate |
| M3 | M1 + Time deposits | Broad money |
| M4 | M3 + All deposits with post office | Widest measure |
SECTION D — Case Study / Application (5 Marks)
The Reserve Bank of India observed a surge in credit growth and inflationary pressure.
To maintain price stability, it increased the repo rate and conducted open market sales of government securities.
Commercial banks were also advised to maintain a higher Cash Reserve Ratio.
(a) What will be the likely impact of these measures on the money supply?
Answer: Money supply will decrease as credit creation reduces and liquidity contracts.
(b) Explain how increasing the repo rate affects credit creation.
Answer: Higher repo rate makes borrowing costlier for banks, reducing lending to the public and curbing credit creation.
(c) Mention any two other monetary policy tools available with RBI.
Answer: (i) Statutory Liquidity Ratio (SLR) (ii) Bank Rate Policy