Money and Banking Test - 5

The services administered by  
government and paid for collectively through taxation are known as public goods. 

Examples of public goods are National defense, Roads, National forests. 

But, if we talk about cars, they are the mixed public goods.

M1 includes:
- Currency with public: This refers to the physical notes and coins in circulation that are held by individuals and businesses.
- Post Office savings deposits: These are deposits made by individuals in their post office savings accounts, which are considered as a part of the M1 money supply.
- Term deposits in RBI: This refers to the term deposits made by individuals and businesses with the Reserve Bank of India (RBI), which are included in the M1 money supply.
- Term deposits: These are deposits made by individuals and businesses in commercial banks for a fixed term, which are also considered as a part of the M1 money supply.
Explanation:
M1 is a measure of the money supply that includes the most liquid forms of money in an economy. It represents the total amount of money that is readily available for spending and can be used for transactions.
The components of M1 include currency with the public, which refers to the physical notes and coins held by individuals and businesses. This is the most tangible form of money and is readily accepted in transactions.
Post Office savings deposits are also included in M1. These are deposits made by individuals in their post office savings accounts, which are considered part of the money supply as they can be easily converted into cash and used for transactions.
Term deposits in RBI are also included in M1. These refer to the deposits made by individuals and businesses with the Reserve Bank of India (RBI). Although these deposits have a fixed term, they are included in M1 as they can be easily converted into cash if needed.
Finally, term deposits made by individuals and businesses in commercial banks are also considered part of M1. These deposits have a fixed term but can be easily converted into cash through early withdrawal or by taking a loan against the deposit.
Overall, M1 includes the most liquid forms of money in an economy, which can be readily used for transactions and spending.

M2 is a calculation of the money supply that includes all elements of M1 as well as "near money."M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds and other time deposits.

Answer:

One of the types of deposit accounts offered by commercial banks is a savings account. A savings account is a popular choice for individuals to deposit their money and earn interest on their savings.

Here are some key points about savings accounts:

• Savings accounts allow individuals to deposit their money with a bank and earn interest on their savings.


• The interest rates offered on savings accounts may vary from bank to bank.


• Savings accounts provide a safe and secure way to store money.


• Individuals can access their savings accounts and withdraw money as needed.


• Some savings accounts may have minimum balance requirements.


• Savings accounts may offer additional features like online banking and ATM access.


• Interest earned on savings accounts is typically taxable.


• Savings accounts are often used by individuals to save for short-term goals or emergencies.


 

It is important to note that while savings accounts provide a safe and convenient way to store money, the interest rates offered on savings accounts are generally lower compared to other investment options. Therefore, individuals looking for higher returns may opt for other types of investment accounts like mutual funds or share holdings.

Barter system is now replaced by Monetary system

• The barter system was an ancient method of exchanging goods and services without the use of money.


• Under the barter system, individuals directly traded their goods or services for other goods or services they needed.


• However, the barter system had several limitations:
  
  
  • Lack of a common measure of value: It was difficult to determine the value of different goods and services in terms of each other.
  
  
  • Double coincidence of wants: Both parties had to have a mutual desire for each other's goods or services, which made direct exchanges less likely.
  
  
  • Lack of divisibility: Some goods or services were not easily divisible, making it challenging to exchange them for smaller items.
  
  
   


• The monetary system, on the other hand, replaced the barter system and introduced the use of money as a medium of exchange.


• Money serves as a common measure of value, making it easier to compare the worth of different goods and services.


• With the introduction of money, individuals can exchange their goods or services for money and use that money to acquire other goods or services they desire.


• The monetary system also overcomes the limitations of the barter system:
  
  
  • Money eliminates the need for a double coincidence of wants as individuals can sell their goods or services for money, which can be used to purchase any other goods or services.
  
  
  • Money is divisible, allowing for more flexible exchanges and transactions.
  
  
   


 

Therefore, the barter system has been replaced by the monetary system, where money is used as a medium of exchange, making transactions more efficient and convenient.

The fraction of deposits kept as Cash Reserves by commercial banks is maintained by the Central Bank.
Explanation:
The Central Bank, also known as the Reserve Bank or the Monetary Authority, is responsible for regulating and supervising the banking system in a country. One of the key functions of the Central Bank is to control the money supply in the economy. To achieve this, the Central Bank mandates commercial banks to maintain a certain percentage of their deposits as Cash Reserves.
Here's a breakdown of the answer:
Rural bank: Rural banks are financial institutions that serve primarily rural areas. While they also maintain Cash Reserves, they do not regulate the fraction of deposits held as reserves by commercial banks.
World bank: The World Bank is an international financial institution that provides loans and grants to the governments of poorer countries for the purpose of pursuing capital projects. It does not regulate the fraction of deposits held as reserves by commercial banks.
Commercial banks: Commercial banks accept deposits from the public and lend money to individuals and businesses. While they do maintain Cash Reserves, the fraction of deposits held as reserves is determined by the Central Bank.
Central bank: The Central Bank is the regulatory authority that sets the reserve requirements for commercial banks. It determines the fraction of deposits that commercial banks must keep as Cash Reserves to ensure the stability of the banking system and control the money supply.
Therefore, the correct answer is D: Central bank.

Cash Reserve Ratio is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves with the central bank.

Cash Reserves Ratio (CRR) refers to the proportion of total deposit of the commercial banks which they must keep as reserves with the central bank in the form of cash deposits. In other words, these are the cash deposits of commercial banks with the central bank which they have to deposit as a legal requirement with central bank. The ratio is fixed by the central bank and is varied from time to time to control the supply of money in the economy depending upon the prevailing situation of inflation or deflation.

Explanation:
The fraction of deposits kept as Cash Reserves by commercial banks is a legal requirement. This requirement is imposed by financial regulatory authorities to ensure the stability and safety of the banking system. Here is a detailed explanation:
Definition of Cash Reserves:
Cash reserves refer to the portion of deposits that a commercial bank is required to keep in the form of cash or as deposits with the central bank. This serves as a buffer to meet customer withdrawals and other liquidity needs.
Reasons for the Legal Requirement:
The legal requirement for commercial banks to maintain cash reserves is driven by several factors:
1. Financial Stability: Cash reserves act as a safeguard against bank runs and financial crises. By holding a certain percentage of deposits as reserves, banks ensure that they have enough funds to meet customer demands for withdrawals.
2. Liquidity Management: Cash reserves help banks manage their liquidity and ensure that they have enough funds to meet short-term obligations. This is especially important during periods of economic uncertainty or financial market volatility.
3. Monetary Policy Implementation: Central banks use the reserve requirement as a tool to influence the money supply and manage inflation. By adjusting the reserve ratio, central banks can control the amount of money that banks can lend out, thus affecting the overall level of economic activity.
4. Consumer Protection: Requiring banks to maintain cash reserves helps protect depositors' funds and ensures that they can access their money when needed. This promotes confidence in the banking system and encourages individuals and businesses to deposit their money in banks.
Consequences of Non-compliance:
Failure to adhere to the legal requirement of maintaining cash reserves can result in penalties and regulatory sanctions for commercial banks. These penalties can include fines, restrictions on banking activities, or even the revocation of a bank's license to operate.
In conclusion, the fraction of deposits kept as Cash Reserves by commercial banks is a legal requirement imposed by financial regulatory authorities. This requirement aims to maintain financial stability, manage liquidity, implement monetary policy, and protect depositors' funds.

Fractional-reserve banking is the common practice by commercial banks of accepting deposits, and making loans or investments, while holding reserves at least equal to a fraction of the bank 's deposit liabilities. Reserves are held as currency in the bank, or as balances in the bank 's accounts at the central bank.