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Money and banking
Economics
Useful for: UPSC Civil Services, OSSC RHT — Regular High School Teacher, OSSC Economics, OSSSC Govt TGT Arts, SSB Lecturer (Degree Colleges), SSB TGT Arts
Overview
Money supply is measured by monetary aggregates; banks create credit, and reforms shaped India’s banking structure.
Key points
- M0 (reserve money) = currency in circulation + bankers’ deposits with RBI + other deposits with RBI.
- M1 = currency with the public + demand deposits + other deposits with RBI.
- M3 (broad money) = M1 + time deposits of banks.
- Money multiplier = broad money ÷ reserve money.
- 14 banks were nationalised in 1969 and 6 more in 1980.
- Narasimham Committees (1991, 1998) recommended financial-sector reforms.
Explanation
- Higher CRR reduces the money multiplier.
- Basel III norms strengthen bank capital and liquidity.
- NBFCs are regulated by the RBI but cannot accept demand deposits.
- Payments and small finance banks broaden access.
- Deposit insurance by DICGC covers up to ₹5 lakh per depositor per bank.
Step by step
- Identify the concept, law or fact asked.
- Recall the definition, formula, example or year.
- Apply it and eliminate mismatched options.
Examples
- Statement: "M3 includes time deposits." → Correct.
- Statement: "14 banks were nationalised in 1980." → Incorrect (1969; six more in 1980).
- Statement: "A higher CRR increases the money multiplier." → Incorrect.
Traps and advanced points
- Trap: Mixing M1 and M3.
- Trap: Wrong nationalisation years.
- Trap: Direction of CRR effect.
Quick revision
- M3 = M1 + time deposits.
- 1969 (14), 1980 (6).
- Narasimham 1991, 1998.
Practice MCQs
From the perspective of definition and scope, which one of the following statements about Banking & Money is correct?
- Banks can create unlimited credit without capital, liquidity, regulation or borrower demand constraints.
- Banking & Money is unrelated to institutions, processes or real-world applications.
- Banking & Money has no exceptions or limitations in exam analysis.
- Commercial banks create deposits through lending within regulatory, capital, liquidity and demand constraints.
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Answer: (d) Commercial banks create deposits through lending within regulatory, capital, liquidity and demand constraints.. Commercial banks create deposits through lending within regulatory, capital, liquidity and demand constraints.
Consider the following statements on Banking & Money, focusing on definition and scope: 1. Commercial banks create deposits through lending within regulatory, capital, liquidity and demand constraints. 2. Banks can create unlimited credit without capital, liquidity, regulation or borrower demand constraints. Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
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Answer: (a) 1 only. Statement 1 is correct; Statement 2 is a common misconception.
With reference to Banking & Money (definition and scope), consider the following statements: 1. Financial inclusion includes access, usage, affordability and quality, not merely account opening. 2. Commercial banks create deposits through lending within regulatory, capital, liquidity and demand constraints. Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
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Answer: (c) Both 1 and 2. Both statements are correct.
From the perspective of practical application, which one of the following statements about Banking & Money is correct?
- Financial inclusion includes access, usage, affordability and quality, not merely account opening.
- Per-capita income is an average and does not itself reveal distribution.
- Revenue and capital classifications describe different economic/accounting characteristics of receipts and expenditure.
- Real interest rate is approximately nominal interest rate minus inflation for basic analysis.
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Answer: (a) Financial inclusion includes access, usage, affordability and quality, not merely account opening.. Financial inclusion includes access, usage, affordability and quality, not merely account opening.
With reference to Banking & Money (working mechanism), consider the following statements: 1. Commercial banks create deposits through lending within regulatory, capital, liquidity and demand constraints. 2. Money performs medium-of-exchange, unit-of-account and store-of-value functions. Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
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Answer: (c) Both 1 and 2. Both statements are correct.
With reference to Banking & Money (institutional design), consider the following statements: 1. Commercial banks create deposits through lending within regulatory, capital, liquidity and demand constraints. 2. Financial inclusion includes access, usage, affordability and quality, not merely account opening. Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
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Answer: (c) Both 1 and 2. Both statements are correct.
Consider the following statements on Banking & Money, focusing on working mechanism: 1. Bank balance-sheet health affects credit transmission. 2. Banks can create unlimited credit without capital, liquidity, regulation or borrower demand constraints. Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
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Answer: (a) 1 only. Statement 1 is correct; Statement 2 is a common misconception.
Consider the following statements on Banking & Money and Fiscal Policy & Budget, focusing on institutional design: 1. Banks can create unlimited credit without capital, liquidity, regulation or borrower demand constraints. 2. Every increase in government expenditure has the same growth and distribution effect regardless of its composition. Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
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Answer: (d) Neither 1 nor 2. None of the given statements is correct, so the answer is (D) Neither 1 nor 2. Neither statement is correct; both are common misconceptions.
With reference to Banking & Money (definition and scope), consider the following statements: 1. Financial inclusion includes access, usage, affordability and quality, not merely account opening. 2. Money performs medium-of-exchange, unit-of-account and store-of-value functions. Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Read chapter notes · Similar questions
Show answer
Answer: (c) Both 1 and 2. Both statements are correct, so the answer is (C) Both 1 and 2. Statement 1 is correct. Statement 2 is correct.
Consider the following statements on Banking & Money, focusing on practical application: 1. Financial inclusion includes access, usage, affordability and quality, not merely account opening. 2. Commercial banks create deposits through lending within regulatory, capital, liquidity and demand constraints. Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Read chapter notes · Similar questions
Show answer
Answer: (c) Both 1 and 2. All the given statements are correct, so the answer is (C) Both 1 and 2. Both statements are correct.
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