What traumatic event does Zitkala-Sa describe at the school?

The forcible cutting of her long hair

Why was the cutting of her hair so humiliating to Zitkala-Sa?

Among her people, shingled hair was worn by cowards and mourners

What is barter and what is its main drawback?

Barter is the direct exchange of goods for goods; its main drawback is the lack of a double coincidence of wants.

What is transaction demand for money?

The demand for money to carry out everyday purchases; it rises with the value of transactions and hence with income.

Why is speculative demand for money inversely related to the interest rate?

At high interest rates people hold bonds expecting capital gains, so money demand is low; at low rates they hold money, so demand is high.

Distinguish between narrow money and broad money.

Narrow money (M1, M2) includes currency and demand deposits; broad money (M3, M4) also includes time deposits and post-office savings.

What is high-powered money?

Currency issued by the central bank, held by the public and banks, which serves as the base for credit creation.

How do commercial banks create money?

By keeping only a fraction of deposits as reserves and lending the rest, which returns as new deposits, multiplying the money supply.

What is the money multiplier?

The ratio by which total deposits expand from a given reserve, equal to the reciprocal of the reserve ratio, \(\dfrac{1}{\text{CRR}}\).

Name the quantitative tools used by the RBI to control money supply.

The cash reserve ratio, statutory liquidity ratio, bank rate, repo and reverse repo rates, and open market operations.

Why is the central bank called the lender of last resort?

Because it stands ready to lend to commercial banks in difficulty when they cannot obtain funds elsewhere, ensuring stability of the banking system.

Money and Banking

Q: State the main functions of money.

Medium of exchange, unit of account, store of value, and standard of deferred payment.

Class 12 Economics · Introductory Macroeconomics · Chapter 3

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Summary

Money is anything commonly accepted as a medium of exchange. It overcomes the problems of barter, which requires a double coincidence of wants, and performs four functions: medium of exchange, unit of account, store of value, and standard of deferred payment. The demand for money arises from the transaction motive (money needed to carry out purchases, related to income) and the speculative motive (holding money versus bonds, inversely related to the interest rate). The supply of money consists of currency and bank deposits, measured as \(M_1,M_2,M_3,M_4\), where M1 and M2 are narrow money and M3 and M4 are broad money. Money is created by the banking system. The central bank — the Reserve Bank of India — issues currency (high-powered money), acts as banker to the government and to banks, holds foreign exchange reserves and is the lender of last resort. Commercial banks accept deposits and lend, creating credit. Because banks keep only a fraction of deposits as reserves, an initial deposit multiplies into a larger total through the money multiplier, \(\text{money multiplier}=\dfrac{1}{\text{CRR}}\). The RBI controls money supply using quantitative tools — the cash reserve ratio (CRR), statutory liquidity ratio (SLR), bank rate, repo and reverse repo rates, and open market operations — and qualitative tools such as margin requirements and moral suasion.

Key terms

Barter

Direct exchange of goods for goods, requiring a double coincidence of wants.

Money supply (M1–M4)

Measures of money: M1 and M2 are narrow money, M3 and M4 are broad money.

High-powered money

Currency issued by the central bank that forms the base for credit creation.

Money multiplier

The factor by which deposits expand from reserves, \(\dfrac{1}{\text{CRR}}\).

Cash Reserve Ratio

The fraction of deposits banks must keep as reserves with the central bank.

Repo rate

The rate at which the RBI lends to commercial banks against securities.

Extra questions & answers

Try one from this chapter

The main drawback of the barter system is:

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