Money and Banking online Test - 46

Money supply at a given point of time is equal to the sum total of currency held by public and demand deposits with commercial banks.

It is the rate of interest that commercial banks receive on their deposits kept with central bank.

Money functions as a medium of exchange, allowing individuals to trade goods and services with one another. It also serves as a store of value, allowing people to save wealth over time. Lastly, it functions as a unit of value, enabling people to compare the worth of different items.

Consortium approach lending stated that more than one bank could finance a single borrower which requires large credit limit. It helps the bank to spread the risk of lending and also break the monopoly of big banks to have the capacity to lend a big amount.

Fiat money refers to the government-authorised money not backed by any equivalent assets.

M₃ is the benchmark currency measure used to control the money supply in the economy.

Legal tender money and fiat money are one or the same thing and backed by the government authority.

The functioning of the barter system requires a double coincidence of wants on the part of those who want to exchange goods or services. It is necessary for a person who wishes to trade his good or service to find some other person who is not only willing to buy his good or service, but also possesses that good which the former wants.
The existence of such a double coincidence of wants is a remote probability. For, it is a very laborious and time-consuming process to find out person who want each other’s goods.

For the issue of currencies, the RBI follows Minimum Reserve System at present. The Minimum Reserve System (MRS) is followed from 1956 onwards.

Under the Minimum Reserve System, the RBI has to keep a minimum reserve of Rs 200 crore comprising of gold coin and gold bullion and foreign currencies. Out of the total Rs 200 crores, Rs. 115 crore should be in the form of gold coins or gold bullion. 

The purpose of shifting to this system was to expand money supply to meet the needs of increasing transactions in the economy.

Under this Section, a collecting bank has protection only if the collecting bank, in good faith and without negligence, receives payment of the customer by a cheque, i.e. if there is negligence in receiving of a cheque on behalf of the customer, the collecting bank would be liable for negligence.