dpp board exam

TEST 1 11/03/2024
Class 12 - Economics

Section A
Question No. 1 to 6 are based on the given text. Read the text carefully and answer the questions: [6]
In modern times, the sources of supply of money are government, the central bank of the country, and commercial
banks. In India, it is the Ministry of Finance that issues Rs.1 notes and all the coins. Money is mainly supplied by the
Central bank of the country.RBI issues currency on the basis of the minimum reserve system. Under this system, the
reserve bank has to maintain a minimum reserve of Rs.200 crores in the forms of gold and foreign securities.
Commercial banks create credit on the basis of demand deposits, and on the basis of their cash reserves. When the
commercial banks provide credit to the people, they add to the supply of money.
On the other hand, when they reduce the provision of credit, the supply of money is reduced. Expansion or contraction
of the money supply by the commercial banks is governed by the monetary policy of the Reserve Bank of India.
1. When commercial banks create credit on the basis of deposit and reserves, it will ________.

a) both create and reduce money b) create money

c) reduce money d) agency function

2. The supply of currency in India is governed by ________.

a) all of these b) Reserve bank of India

c) private bank d) commercial bank

3. RBI maintains gold and foreign securities at a minimum level. Under ________ system such level is maintained.

a) maximum reserve b) minimum reserve

c) money supply d) cash reserve

4. All types of currency are not issued by a single authority. ________ issues all coins and ₹ 1 paper notes.

a) All of these b) Private banks

c) Ministry of Finance d) RBI

5. Which among the following is not a source of supply of money?

a) Government b) Finance Ministry

c) Central Bank d) Commercial Banks

6. Who governs the expansion or contraction of the money supply by the commercial banks?

a) It is governed by the monetary policy of the b) It is governed by the Conferedation of the

Government of India. Commercial Banks.

c) It is governed by the monetary policy of the d) It is governed by the economic policies of

Reserve Bank of India. the country.

Question No. 7 to 12 are based on the given text. Read the text carefully and answer the questions: [6]

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The State Bank of India is the largest commercial bank in the country and is among the 100 topmost banks in the world.
The State Bank has seven subsidiary banks attached to it. Besides these public sector banks which control over 90
percent of the banking activity in the country, there are non-nationalized scheduled banks and non-scheduled banks. A
bank that has capital and reserves of over ₹5 lakh is called a scheduled bank and those which have capital and reserves
less than this limit prescribed by the RBI Act, are categorised as nonscheduled banks. The number of scheduled
commercial banks, both nationalized and non-nationalized, stood as 272 at the end of March 1993. There were also four
non-scheduled banks. Besides, there were 19 foreign banks operating in the country.
With a view to bringing commercial banks into the mainstream of economic development with definite social
objectives, the government issued an ordinance on July 19, 1969, acquiring ownership and control of 14 major banks
with deposits exceeding ₹50 crores each. Six more commercial banks were nationalized on April 15, 1980.
7. Commercial banks create money by way of:

a) demand deposits b) time deposits

c) treasury bills d) bill of exchange

8. The main aim of the commercial banks is:

a) social welfare b) all of the above

c) to provide services to the people d) to earn profits

9. In case, a commercial bank fails to get financial accommodation from anywhere, it approaches the ________ as a last
resort.

a) scheduled bank b) non schedule bank

c) central bank d) cooperative bank

10. Assertion (A): With a view to bringing commercial banks into the mainstream of economic development with definite
social objectives.
Reason (R): Some banks are nationalized.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

Bank A Bank B
11.
has capital and reserves of over ₹5 lakh has less than the prescribed capital and reserves

Bank A can be called as a ________ bank and Bank B is a ________ bank.

a) scheduled, non-scheduled b) cooperative, grameen

c) non-scheduled , scheduled d) private, public

12. Commercial banks are continuously involved in the process of deposit and loan creation. The interest rate they pay to
depositors is ________ than the rate charged from the borrowers. The difference between these two types of interest
rates is called the __________ profit of the bank.

a) higher, net b) lower, spread

c) higher, balance d) lower, gross

Question No. 13 to 18 are based on the given text. Read the text carefully and answer the questions: [6]

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The central bank also plays an important part in the regulatory role as it decides whether or not to grant charters to new
banks. In most countries around the world, charters are granted by judicial bodies and not by central banks. For
instance, in the United States a banking charter can be granted either by federal authorities or by state authorities.
However, the Federal Reserve cannot grant a banking charter on its own.
The central banks do play an important role in advising the judicial bodies while such charters are being granted.
Therefore, indirectly central banks can have an influence over the number of new banks entering the market. This puts
them in a position to ensure healthy competition that is beneficial to the consumers but not detrimental to the banks
themselves.
The most important regulatory power that a central bank has is that it can modify the reserve requirements. Thus if this
percentage is increased, commercial banks have to deposit a larger portion of their money with the central bank and
have a smaller percentage to lend out to the market. Hence, a scarcity of funds is created and interest rates begin to rise.
On the other hand, if this reserve requirement is relaxed, banks will have more funds to lend and as a result, the interest
rates will go down given the abundance of funds.
Since the central bank sets the reserve requirements, it is in a position to have a significant influence on the operations
and profits of member commercial banks. The central bank can simply regulate the behavior of the commercial banks
to suit the national interests by modifying the reserve requirement rates.
13. In India, the central bank is:-

a) Federal system b) Reserve Bank of India

c) Federal Reserve System d) Both Federal Reserve System and Federal

system
14. An advisor to the government, the central bank frames policies to regulate the ________.

a) security market b) capital market

c) forex market d) money market

15. Assertion (A): The Central bank keeps some cash balance of commercial bank as a compulsory deposit.
Reason (R): Compulsory deposit made by Central bank helps during the financial crisis.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

16. ________ is the percentage of deposits that any commercial bank has to maintain with the central bank.

a) profits b) deposit

c) savings d) reserves
17. The asset of commercial banks like the State Bank of India (SBI) can be calculated as Assets = Reserves + Loans.
Which among the following does not form an asset for the bank?

a) Loans b) Reserves

c) Buildings d) Stocks
18. How does the central bank play a regulatory role?

a) Advises the judicial bodies when they grant b) It decides whether or not to grant charters to
charters new banks

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 c) It influences the number of new banks d) All of these
entering the market

Question No. 19 to 24 are based on the given text. Read the text carefully and answer the questions: [6]
The central bank adopts various measures to control the supply of money in the economy. Largely, these measures
relate to credit supply by commercial banks. The increase (or decrease) in bank rate is often followed by an increase (or
decrease) in the market rate of interest (the interest rate charged by the commercial banks from the general public).
Accordingly, the cost of credit (also called the cost of capital) changes in the market. Inflation is corrected by selling
the securities and soaking liquidity, while deflation is corrected by buying the securities and releasing liquidity. During
inflation, the cost of capital is increased by increasing the repo rate. This lowers the demand for credit and accordingly,
the supply of money in the economy, as desired. When the reverse repo rate is lowered banks are discouraged to park
their surplus funds with the RBI. Instead, the banks may use these funds as (RR-funds with the RBI. This leads to a rise
in credit supply (money supply) by commercial banks. When the supply of money is to be increased, CRR is lowered,
and when the supply of money is to be reduced, CRR is raised. To decrease the supply of money (as during inflation),
the central bank increases SLR.
19. Assertion (A): Inflation is corrected by selling the securities and soaking liquidity, while deflation is corrected by
buying the securities and releasing liquidity.
Reason (R): Such purchase and sale of securities to control credit is known as open market operations.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

20. The Central Bank issues the currency of the country. It can be held by the public or by commercial banks. This money is
given various names. Pick the odd one out.

a) High-powered money b) Reserve money

c) Bank deposit money d) Monetary base

21. Credit control means:

a) extension and contraction of money supply b) contraction of credit only

c) extension of credit only d) all of these

22. Reverse repo rate:

a) is increased to curb inflation b) generates interest income

c) is not a policy rate d) Both generates interest income and is

increased to curb inflation
23. The central bank has several important functions. Which among the following does not help it control the money supply?

a) credit creation b) bank rate

c) reserve ratios d) open market operations

24. Given below are the functions of commercial banks. Choose the incorrect option:

a) It takes away the excess funds from b) Funds can be kept in the form of deposits in
individuals or firms and supplies them to the banks and borrowed as loans.
poor people.

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 c) People prefer to keep money in banks d) Acts as a mediator between individuals or
because banks offer to pay some interest on firms with excess funds
any deposits made.

Question No. 25 to 30 are based on the given text. Read the text carefully and answer the questions: [6]
Money creation by the commercial banks depends on two principal factors, as under: (i) Cash Balances with
Commercial Banks which they can use as cushion money (emergency fund) for the creation of credit. Higher these cash
balances, greater the money creation (or credit creation) capacity of the commercial banks, and (ii) CRR: Higher the
CRR, lower the capacity to create money. Besides the CRR (cash which the commercial banks ought to keep), the
banks may hold excess reserves, as vault cash. The higher the vault cash, the lower would be the capacity to create
money. In India, CRR is determined not by the commercial banks themselves but by the RBI (Reserve Bank of India).
Therefore, it is also called LRR (Legal Reserve Ratio). Also, the commercial banks are required to keep the stipulated
(legally required) cash reserves not with themselves, but with the RBI (of course, the banks can keep excess reserves as
vault cash with themselves). Once CRR is known (as fixed by the RBI), we can find out the credit multiplier, or the
number of times the commercial banks can create credit, per unit of their cash reserves with the RBI.
25. Assertion (A): The commercial banks are required to keep the stipulated (legally required) cash reserves not with
themselves, but with the RBI.
Reason (R): Money is lent by the commercial banks not in the form of cash, but in the form of credit entry in the
accounts of the borrowers.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

26. Which of the following is not the instrument of credit control?

a) SLR b) CRR

c) Managed floating d) Bank rate

27. With an increase in margin requirement, availability of credit in the economy:

a) unchanged b) increases

c) decreases d) Rise
28. The maximum credit that the commercial banks can legally create depends on their:

a) term deposits b) gold reserves

c) statutory liquidity ratio d) cash reserves with the RBI

29. Fill in the missing section of the column given below:

? emergency fund

excess reserves ?

CRR LRR

a) contingent fund; surplus b) care fund; profit

c) emergency money; cash reserves d) cushion money; vault cash

30. Bank X wants to reserve some cash apart from the stipulated CRR of RBI. How will it affect its money-creating
capacity?

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 a) if the vault cash is lower, its money-creating b) if the cushion money is higher, its money-
capacity will be lower creating capacity will be lower

c) if the vault cash is higher, its money- d) if the cushion money is lower, its money-
creating capacity will be lower creating capacity will be higher
Section B
31. Assertion (A): Exchange is a sign of interdependence. [1]
Reason (R): In economics, the need for change arises when what you possess or what you produce is more than
what you need or when you lack something which you desire to possess.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

32. Assertion (A): Money supply does not include money held by Government and Commercial Banks. [1]
Reason (R): Government and Commercial Banks are themselves the supplier of money.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

33. Assertion (A): Bank Money is a Non-Legal Tender Money. [1]
Reason(R): Bank Money can be refused by any citizen of the country for settlement of a financial transaction.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

34. Assertion (A): M1 measure of money supply is defined as follows: M1 = CU + DD, where CU is Currency [1]
(notes plus coins) held by the public and DD is net demand deposits held by commercial banks. The word net
here implies that only deposits of the public held by the banks are to be included in money supply.
Reason (R): The interbank deposits, which a commercial bank holds in other commercial banks, are not to be
regarded as part of money supply.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

35. Assertion (A): Paper money is becoming more popular these days. [1]
Reason (R): It is generally acceptable and convenient to carry.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

36. Assertion (A): Money Multiplier is the process by which the commercial banks create credit. [1]
Reason (R): Money Creation by Commercial Banks raises the National Income.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

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 c) A is true but R is false. d) A is false but R is true.
37. Assertion (A): Currency held by public is a monetary liability of central bank. [1]
Reason (R): Central bank controls credit, whereas commercial banks creates credit with the currency held by
public.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

38. Assertion (A): Central Bank is also known as the Bank of Issue. [1]
Reason (R): Reserve Bank of India enjoys the sole monopoly of issuing currency.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

39. Assertion (A): The collection of statistics is useful in making policies and plans of growth and development. [1]
Reason (R): Central bank collects statistical information relating to banking, currency, and foreign exchange.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

40. Assertion (A): The central bank issues currency on the basis of CRR. [1]
Reason (R): The CRR impacts the credit creation capacity of the commercial bank.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

Section C
41. State True or False: [10]
(a) Legal tender money has a legal sanction behind it by the government. [1]
(b) Fiat money is the same as Fiduciary money. [1]
(c) State, whether the following statement is true or false: [1]
Demand deposits which come back to the commercial banks through their lending process are known
as secondary deposits.
(d) Use of money separates the acts of sale and purchase. [1]
(e) RBI produces money while commercial banks increase the supply of money. [1]
(f) Sale of securities in the open market by the commercial banks reduces their crediting power. [1]
(g) To reduce the volume of credit, bank rate should be reduced. [1]
(h) Under the marginal requirement, the Reserve Bank of India gives directions to other banks to [1]
channelise credit to priority sectors.
(i) Open market operations are performed by commercial banks. [1]
(j) Like other commercial banks, the Reserve Bank of India maintains a direct relationship with the [1]
people.
Section D
42. Distinguish between money value (or monetary value) and commodity value of money. Give a suitable example. [3]

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43. Explain why time deposits measures of M3 is less liquid than the demand deposits measure of M1. [3]
44. Explain the problem of storing wealth in the context of barter. How has money solved this problem? [3]
45. Read the given information and answer the following questions : [3]
India;s Central Bank, the Reserve Bank of India has announced a reduction in the cash reserve ratio (CRR) by 75
basis points and has lowered the statutory liquidity ratio (SLR) to 23% from 24% to boost the slowing economic
growth in the country by improving liquidity. Ahead of its mid-quarterly policy review, the Reserve Bank of
India today also hinted at cut in bank rates, saying mode-ration in inflation due to lower economic growth and
cooling global oil prices provide room for easing monetary policy. The 75 bps cut would increase the liquidity
by Rs.48,000 in the countrys economy. The additional funds in the economy would help the economy in the
coming months as the liquidity position is expected to become tighter in mid- March due to advance tax
outflows.
The RBI governor has already indicated that the central bank is considering a reversal of the monetary policy as
the inflation is falling and the high interest rates have affected economic growth in the country. The fall in
inflation is due to a good Khari harvest as well as a high base. The fall comes as a relief to the government and
the central bank. Finance Minister has said that he is satisfied with the fall in food items and believes that if the
trend continues, the overall inflation will be under control allowing authorities to increase interest rates and
boost economic growth, which has shown signs of a slowdown in recent months
i. What is CRR ?
ii. What is SLR ?
iii. What is bank rate ?
iv. How will lowering the legal reserves create liquidity in the market ?
v. What is inflation ?
vi. How inflation and production of crops are related to each other ?
46. Explain the "Bank of Issue function" of the central bank. [3]
47. Explain the ‘Lender of the last resort' function of the central bank. [3]
48. Distinguish between loan and overdraft. [4]
49. Explain the ‘medium of exchange’ function of money. How has it solved the related problem created by barter? [4]
50. How demand deposits are different from time deposits? Explain. [4]
51. Explain the function of Central Bank as Banker, Agent and Advisor of the Government. [4]
52. How do changes in Bank Rate affect the money supply in an economy? Explain. [6]
53. Explain the process of money creation by Commercial Banks with the help of a numerical example. [6]
54. What are the instruments of monetary policy of RBI? [6]

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