CBSE Board Paper Practice: Money and Banking (2019-2024)

Part 1: Multiple Choice & Short Answer Questions

MCQs are a great way to quickly check your understanding of key definitions and concepts. They often test your ability to distinguish between similar terms.

Let's watch a video that goes through several typical MCQs.

Let's solidify this with a question from a past paper.

Question (CBSE 2023): Ms. Iqra Ansari, a teacher, was explaining in her class about various types of deposits with the commercial banks. She quoted that- “These deposits form a part of M1 measure of money supply and are payable on demand by the commercial banks.” Identify the type of deposits she was explaining about.

(a) Demand Deposits
(b) Time Deposits
(c) Post Office Deposits

As you saw in the video, the components of M1 are Currency & Coins with the public (C), Demand Deposits (DD), and Other Deposits with RBI (OD). Since the deposits are "payable on demand," they are Demand Deposits.

Part 2: Numerical Problems on Credit Creation

This is a critical section for your exam and an area you wanted to focus on. These questions test your understanding of the money multiplier and the credit creation process. Let's work through a typical problem step-by-step.

Key Formulas to Remember:

• Money Multiplier (k) = $1/\text{LRR}$
• Total Deposits = Initial Deposits × Money Multiplier
• Total Loans/Lending = Total Deposits - Initial Deposits

Problem 1: Suppose in an economy, the initial deposits are ₹500 crores and the Legal Reserve Ratio (LRR) is 25%. Estimate the total deposits created and the total lending by the banking system.

Your Turn (Think & Solve):

1. Calculate the money multiplier.
2. Use the multiplier to find the total deposits.
3. Calculate the total amount of loans.

Now, let's watch the solution.

• Money Multiplier = $1/25\%=1/0.25=4$
• Total Deposits = ₹500 crores × 4 = ₹2000 crores
• Total Lending = Total Deposits - Initial Deposits = ₹2000 - ₹500 = ₹1500 crores

Problem 2: The Impact of a Change in Reserve Ratio

This is a very common variation.
Question: Assume for a hypothetical economy, the Central Bank increases the reserve ratio from 20% to 25%. The total primary deposits stand at ₹1,000. Explain the effect of this rise in the reserve ratio on the credit creation by commercial banks.

Your Turn (Think & Solve):

1. Calculate the money multiplier and total deposits when LRR is 20%.
2. Calculate the money multiplier and total deposits when LRR is 25%.
3. Compare the two outcomes and explain the impact.

Let's check the solution.

• Case 1 (LRR = 20%): Multiplier = $1/0.20=5$. Total Deposits = ₹1,000 × 5 = ₹5,000.
• Case 2 (LRR = 25%): Multiplier = $1/0.25=4$. Total Deposits = ₹1,000 × 4 = ₹4,000.

Conclusion/Explanation: An increase in the reserve ratio from 20% to 25% reduces the money multiplier from 5 to 4. This leads to a fall in the total credit creation capacity of commercial banks from ₹5,000 to ₹4,000. This is because banks now have to keep a larger portion of their deposits as reserves, leaving less money available for lending.

Part 3: Application & Case-Study Questions

These questions test your ability to apply the monetary policy tools we learned in the last lesson to real-world economic situations like inflation.

Case Study (Based on CBSE 2023 Paper):

Now, let's answer the questions based on this text:
(a) Define ‘Repo Rate’.
(b) "Increase in Repo rate is an important tool used by the Monetary Policy Committee to combat the situation of inflation in the Economy." Justify the given statement.

Solution Walkthrough:
(a) Repo Rate is the rate at which the Central Bank (RBI) lends money to commercial banks for their short-term needs against government securities.

(b) This justification requires you to explain the chain of effects:

1. RBI increases Repo Rate: This makes borrowing from the RBI more expensive for commercial banks.
2. Commercial banks increase their lending rates: To compensate for their higher borrowing costs, banks increase the interest rates on loans they offer to the public (e.g., home loans, car loans).
3. Credit becomes costlier for the public: This discourages individuals and businesses from taking loans.
4. Aggregate Demand falls: With less borrowing and spending, the overall demand for goods and services in the economy decreases.
5. Inflation is controlled: The fall in aggregate demand helps to correct the situation of excess demand and brings down the general price level.

This entire logic is a crucial part of your syllabus and is very frequently tested.

Part 4: Long Answer / 6-Mark Questions

Long-answer questions often come in the form of a large case study or ask for a detailed explanation of a process. Don't be intimidated by the length; often, the answers are embedded within the text itself.

The key takeaway from this is to read the provided text carefully. For 6-mark questions, the examiners are looking for a well-structured answer that often involves pulling information from the case and combining it with your conceptual understanding.

Conclusion

Congratulations on completing this intensive review session! We have solved a variety of questions from past CBSE papers, covering all the key learning outcomes for the Money and Banking module. You've practiced MCQs, mastered the numericals on credit creation, and learned how to structure answers for application-based and case-study questions.

Key Takeaways:

• M1 Components: Currency (C) + Demand Deposits (DD) + Other Deposits (OD).
• Credit Creation Formulas: Money Multiplier = $1/\text{LRR}$; Total Deposits = Initial Deposits × Multiplier.
• Monetary Policy Logic: To control inflation, the RBI reduces money supply (increases rates/reserves, sells securities). To fight a recession, it does the opposite.
• Answering Strategy: For case studies, read the text carefully to find clues and direct information. For justification questions, explain the complete cause-and-effect chain.

You are now well-prepared for any question from this unit. In our next lesson, we will move on to the next major unit in Macroeconomics: Income and Employment, starting with the concepts of Aggregate Demand and its components.