Tamilnadu State Board New Syllabus Samacheer Kalvi 12th Economics Guide Pdf Chapter 5 Monetary Economics
Text Book Back Questions and Answers, Notes.

## Tamilnadu Samacheer Kalvi 12th Economics Solutions Chapter 5 Monetary Economics

### 12th Economics Guide Monetary EconomicsText Book Back Questions and Answers

Part – I

Multiple Choice questions

Question 1.
The RBI Headquarters is located at
a) Delhi
b) Chennai
c) Mumbai
d) Bengaluru
c) Mumbai

Question 2.
Money is
a) acceptable only when it has intrinsic value
c) the most liquid of all as sets
d) needed for allocation of resources
c) the most liquid of all as sets

Question 3.
Paper currency system i s managed by the
a) Central Monetary authority
b) State Government
c) Central government
d) Banks
a) Central Monetary authority

Question 4.
The basic distinction M1 between and M2 is with regard to.
a) post office deposits
b) time deposits of banks
c) saving deposits of banks
d) currency
b) time deposits of banks

Question 5.
Irving Fisher’s Quantity Theory of Money was popularized in
a) 1908
b) 1910
c) 1911
d)1914
c) 1911

Question 6.
MV stands for
a) demand for money
b) supply of legal tender money
c) supply of bank money
d) Total supply of money
b) supply of legal tender money

Question 7.
Inflation means
a) Prices are rising
b) Prices are falling
c) Value of money is increasing
d) Prices are remaining the same
a) Prices are rising

Question 8.
………………… inflation results in a serious depreciation of the value of money.
a) Creeping
b) Walking
c) running
d) Hyper
d) Hyper

Question 9.
…………………… inflation occurs when general prices of commodities increase due to an increase in production costs such as wages and raw materials.
a) Cost – push
b) demand-pull
c) running
d) galloping
a) Cost-push

Question 10.
During inflation, who are the gainers?.
a) Debtors
b) Creditors
c) wage and salary earners
d) Government
a) Debtors

Question 11.
…………………. is a decrease in the rate of inflation.
a) Disinflation
b) Deflation
c) Stagflation
d) Depression
a) Disinflation

Question 12.
Stagflation combines the rate of inflation with
a) Stagnation
b) employment
c) output
d) price
a) Stagnation

Question 13.
The study of alternating fluctuations in business activity is referred to in Economics as
a) Boom
b) Recession
c) Recovery

Question 14.
During depression, the level of economic activity becomes extremely
a) high
c) low
d) good
c) low

Question 15.
“Money can be anything that is generally accepted as a means of exchange and that the same time acts as a measure and a store of value”, This definition was given by
a) Crowther
b) A. C. Pigou
c) F.A. Walker
d) Francis Bacon
a) Crowther

Question 16.
A debit card is an example of
a) Currency
b) Paper currency
c) Plastic money
d) Money
c) Plastic money

Question 17.
Fisher’s quantity theory of money is based on the essential function of money as
a) measure of value
b) store of value
c) medium of exchange
d) standard of deferred payment
c) medium of exchange

Question 18.
V in M V = PT equation stands for
b) Velocity of circulation of money
c) Volume of transaction
d) Volume of bank and credit money
b) Velocity of circulation of money

Question 19.
When prices rise slowly, we call it
a) galloping inflation
b) mild inflation
c) hyperinflation
d) deflation
b) mild inflation

Question 20.
……………… inflation is in no way dangerous to the economy.
a) walking
b) running
c) creeping
d) galloping
c) creeping

PART-B

Answer the following questions in one or two sentences.

Question 21.
Define Money.

1. Many economists developed definitions for money. Among these, definitions of Walker and Crowther are given below:
“Money is, what money does ” – Walker.
2. “Money can be anything that is generally accepted as a means of exchange and at the same time acts as a measure and a store of value”. – Crowther
3. Money is anything that is generally accepted as payment for goods and services and repayment of debts and that serves as a medium of exchange.
4. A medium of exchange is anything that is widely accepted as a means of payment.

Question 22.
What is barter?
Exchange of goods for goods was known as the ” Barter System”

Question 23.
What is commodity money?

1. After the barter system and commodity money system, modem money systems evolved.
2. Among these, metallic standard is the premier one. ,
3. Under metallic standard, some kind of metal either gold or silver is used to determine the standard value of the money and currency.
4. Standard coins made out of the metal are the principal coins used under the metallic standard.
5. These standard coins are full bodied or full weighted legal tender.
6. Their face value is equal to their intrinsic metal value.

Question 24.
What is gold standard?
Gold standard is a system in which the value of the monetary unit or the stan¬dard currency is directly linked with gold.

Question 25.
What is Plastic money? Give example.

1. The latest type of money is plastic money.
2. Plastic money is one of the most evolved forms of financial products.
3. Plastic money is an alternative to cash or the standard “money”.
4. Plastic money is a term that is used predominantly in reference to the hard plastic cards used every day in place of actual banknotes.
5. Plastic money can come in many different forms such as Cash cards, Credit cards, Debit cards, Pre-paid Cash cards, Store cards, Forex cards, and Smart cards.
6. They aim at removing the need for carrying cash to make transactions.

Question 26.
Define inflation.
” Too much of money chasing too few goods”- Coulbourn.

Question 27.
What is Stagflation?
Stagflation is a combination of stagnant economic growth, high unemployment, and high inflation.

PART-C

Answer the following questions in a paragraph.

Question 28.
Write a note on metallic money.

• Among the modern money systems evolved, the metallic standard is the premier one.
• Under the metallic standards, some kind of metal either gold or silver is used to determine the standard value of the money and currency.
• Standard coins made out of the metal are the principal coins used under the metallic standard.
• Their face value is equal to their intrinsic metal value.
• These standard coins are full-bodied full weighted legal tender.

Question 29.
What is money supply?

1. Money supply means the total amount of money in an economy.
2. It refers to the amount of money which is in circulation in an economy at any given time.
3. Money supply plays a crucial role in the determination of price level and interest rates.
4. Money supply viewed at a given point of time is stock and over a period of time it is a flow.

Question 30.
What are the determinants of the money supply?

• Currency deposits Ratio (CDR): It is the ratio of money held by the public in currency to that they held in bank deposits.
• Reserve Deposit Ratio (RDR) : It consists of two things (a) vault cash in banks and (b) deposits of commercial banks with RBI.
• Cash Reserve Ratio (CRR): It is the fraction of the deposits the banks must keep with RBI. .
Statutory Liquidity Ratio (SLR): It is the fraction of the total demand and time deposits of the commercial banks in the form of specified liquid assets.

Question 31.
Write the types of inflation.
The four types of inflation are –
1. Creeping Inflation:
Creeping inflation is slow-moving and very mild. The rise in prices will not be perceptible but spread over a long period. This type of inflation is in no way dangerous to the economy. This is also known as mild inflation or moderate inflation.

2. Walking Inflation:
When prices rise moderately and the annual inflation rate is a single digit. (3% – 9%), it is called walking or trolling inflation.

3. Running Inflation:
When prices rise rapidly like the running of a horse at a rate of speed of 10% – 20% per annum, it is called running inflation.

4. Galloping inflation:
Galloping inflation or hyperinflation points out to unmanageably high inflation rates that run into two or three digits. By high inflation, the percentage of the same is almost 20% to 100% from an overall perspective.

Other types of inflation (on the basis of inducement):

1. Currency inflation:
The excess supply of money in circulation causes rise in price level.

2. Credit inflation:
When banks are liberal in lending credit, the money supply increases and thereby rising prices. .

3. Deficit induced inflation:
The deficit budget is generally financed through the printing of currency by the Central Bank. As a result, prices rise.

4. Profit induced inflation:
When the firms aim at higher profit, they fix the price with higher margin. So prices go up.

5. Scarcity induced inflation:
Scarcity of goods happens either due to fall in production (e.g. farm goods) or due to hoarding and black marketing. This also pushes up the price. (This has happened is Venezula in the year 2018).

6. Tax induced inflation:
Increase in indirect taxes like excise duty, custom duty and sales tax may lead to rise in price (e.g. petrol and diesel). This is also called taxflation.

Question 32.
Explain Demand-pull and Cost-push inflation.

• Demand-pull Inflation: If the demand is high for a product and supply is low, the price of the products increases.
• Cost-push Inflation: when the cost of raw materials and other inputs rises inflation results. An increase in wages paid to labour also leads to inflation.

Question 33.
State Cambridge equations of the value of money.
Cambridge Approach (Cash Balances Approach):

1. Marshall’s Equation:
The Marshall equation is expressed as:
M = KPY
Where
M is the quantity of money Y is the aggregate real income of the community. P is Purchasing Power of money
K represents the fraction of the real income which the public desires to hold in the form of money.
Thus, the price level P = M/KY or the value of money (The reciprocal of the price level) is 1/P = KY/M
The value of money in terms of this equation can be found out by dividing the total quantity of goods that the public desires to holdout of the total income by the total supply of money. According to Marshall’s equation, the value of money is influenced not only by changes in M, but also by changes in K.

2. Keynes’Equation
Keynes equation is expressed as:
n = pk (or) p = n / k
Where
n is the total supply of money p is the general price level of consumption goods
k is the total quantity of consumption units the people decide to keep in the form of cash, Keynes indicates that K is a real balance, because it is measured in terms of consumer goods. According to Keynes, peoples’ desire to hold money is unaltered by the monetary authority. So, price level and value of money can be stabilized through regulating quantity of money (n) by the monetary authority.
Later, Keynes extended his equation in the following form:
n = p (k + rk’) or p = n / (k + rk’)
Where,
n = total money supply p = price level of consumer goods
k = peoples’ desire to hold money in hand (in terms of consumer goods) in the total income of them
r = cash reserve ratio
k’ = community’s total money deposit in banks, in terms of consumers goods.
In this extended equation also, Keynes assumes that k, k’, and r are constant. In this situation, price level (P) is changed directly and proportionately changing in money volume (n).

Question 34.
Explain disinflation.

• Disinflation is slowing down the rate of inflation by controlling the amount of credit available to consumers without causing more unemployment.
• Disinflation may be defined as the process of reversing inflation without creating unemployment or reducing output in the economy.

PART – D

Question 35.
Illustrate Fisher’s Quantity theory of money.

• The general form of “Equation of Exchange” given by Fisher is
• M V = PT
• This equation is referred to as ‘Cash Transaction Equation.’ Where M = money supply/quantity of money
• v = velocity of money
• p = Price level
• T = volume of Transaction
• It is expressed as
• $$P=\frac{M V}{T}$$
• Later, Fisher extended his original equation of exchange to include bank deposits M1 and its velocity V 1
The revised equation was :
FT = MV+ M1 V 1
$$P=\frac{M V+M^{\prime} V^{\mid}}{T}$$
P = f(M)

• Figure (A) shows the effect of changes in the quantity of money on the price level.
• When the quantity of money is 0M, the price level is OP. When the quantity of money is doubled to OM2, the price level is also double to OP2. Further, when the quantity of money is increased four-fold to OM4, the price level also increases by four times to OP4. This relationship is expressed by the curve OP = f (M) from the origin at 45°.
• Figure (B) shows the inverse relationship between the quantity of money and the value of money where the value of money is taken on the vertical axis. When the quantity of money is 0M, the value of money, O1/P1 – But with the doubling of the quantity of money to OM2, the value of money becomes one- half of what it was before, (0I/P2).
• But, with the quantity of money increasing by fourfold to OM4. the value of money is reduced by 01/P4.
• This inverse relationship between the quantity of money and the value of money is shown by downward sloping curve 1/ OP = f(M)

Question 36.
Explain the functions of money.
The main functions of money can be classified into four. They are

1. Primary Functions
2. Secondary Functions
3. Contingent Functions
4. Other Functions

I.Primary Functions:

• Money as a Medium of Exchange:
This is considered as the basic function of money. Money has the quality of general acceptability, and all exchanges take place in terms of money.
• Money as a measure of value :
The prices of all goods and services are expressed in terms of money. Money is thus looked upon as a collective measure of value.

II. Secondary Functions:

• Money as a store of value :
The difficulty of savings done by commodities is overcome by the invention of money. Money also serves as an excellent store of wealth, as it can be easily converted into other marketable assets, such as land, machinery, plant etc.,
• Money as a standard of Deferred payments: The modern money- economy has greatly facilitated the borrowing and lending processes. In other words, money now acts as the standard of deferred payments.
• Money as a means of Transferring purchasing power: The exchange of goods is now extended to distant lands. It is therefore, felt necessary to transfer purchasing power from one place to another.

III. Contingent Functions :

• Basis of the credit system: Money is the basis of the credit system. Business transactions are either in cash or on credit.
• Money facilitates the distribution of National Income: The invention of money facilitated the distribution of income as rent, wage, interest, and profit.
• Money helps to Equalize Marginal utilities and Marginal productivities: As the prices of all commodities are expressed in money it is easy to equalize marginal utilities derived from the commodities. Money also helps to equalize marginal productivities of various factors of production.
• Money Increases productivity of capital: Money is the most liquid form of capi¬tal. It is on account of this liquidity of money that capital can be transferred from the less productive to the more productive uses.

IV. Other functions:

• Money helps to maintain Repayment capacity
• Money represents Generalized purchasing power
• Money gives liquidity to capital

Question 37.
What are the causes and effects of inflation on the economy?
Causes of Inflation:
The main causes of inflation in India are as follows:

1. Increase in Money Supply:
Inflation is caused by an increase in the supply of money which leads to an increase in aggregate demand. The higher the growth rate of the nominal money supply, the higher is the rate of inflation.

2. Increase in Disposable Income:
When the disposable income of the people increases, it raises their demand for goods and services. Disposable income may increase with the rise in national income or reduction in taxes or reduction in the saving of the people.

3. Increase in Pubiic Expenditure:
Government activities have been expanding due to developmental activities and social welfare programmes. This is also a cause for price rise.

4. Increase in Consumer Spending:
The demand for goods and services increases when they are given credit to buy goods on a hire-purchase and installment basis.

5. Cheap Monetary Policy:
Cheap monetary policy or the policy of credit expansion also leads to an increase in the money supply which raises the demand for goods and services in the economy.

6. Deficit Financing:
In order to meet its mounting expenses, the government resorts to deficit financing by borrowing from the public and even by printing more notes.

7. Black Assests, Activities and Money:
The existence of black money and black assets due to corruption, tax evasion, etc., increase the aggregate demand. People spend such money, lavishly. Black marketing and hoarding reduce the supply of goods.

8. Repayment of Public Debt:
Whenever the government repays its past internal debt to the public, it leads to increase in the money supply with the public.

9. Increase in Exports:
When exports are encouraged, domestic supply of goods decline. So prices rise.

Effects of Inflation:
The effects of inflation can be classified into two heads:

1. Effects on Production and
2. Effects on Distribution.

1. Effects on Production:
When inflation is very moderate, it acts as an incentive to traders and producers. This is particularly prior to full employment when resources are not fully utilized. The profit due to rising prices encourages and induces business class to increase their investments in production, leading to the generation of employment and income.

(I) However, hyperinflation results in a serious depreciation of the value of money.

(II) When the value of money undergoes considerable depreciation, this may even drain out the foreign capital already invested in the country.

(III) With reduced capital accumulation, the investment will suffer a serious setback which may have an adverse effect on the volume of production in the country.

(IV) Inflation also leads to hoarding of essential goods both by the traders as well as the consumers and thus leading to still hiher inflation rate.

(V) Inflation encourages investment in speculative activities rather than productive purposes.

2. Effects on Distribution:

1. Debtors and Creditors:
During inflation, debtors are the gainers while the creditors are losers.

2. Fixed – income Groups:
The fixed income groups are the worst hit during inflation because their incomes being fixed do not bear any relationship with the rising cost of living.

3. Entrepreneurs:
Inflation is a boon to the entrepreneurs whether they are manufacturers, traders, merchants or businessmen because it serves as a tonic for business enterprise.

4. Investors:
The investors, who generally invest in fixed interest yielding bonds and securities have much to lose during inflation.

Question 38.
Describe the phases of the trade cycle.
The four different phases of the trade cycle are

1. Boom
2. Recession
3. Depression and
4. Recovery.

i) Boom or prosperity phase: The full employment and the movement of the economy beyond full employment is characterized as the boom period. During this period money wages rise, profits increase and interest rates go up The demand for bank credit increases and there is all-around optimism.

ii) Recession: The turning point from a boom is called recession. Generally, the failure of a company or bank bursts the boom and brings a phase of recession. Investments are drastically reduced, production comes down and income and profit decline. There is panic in the stock market and business activities show signs of dullness. As the liquidity preference rises money market becomes tight.

iii) Depression: During depression on the level of economic activity becomes extremely low. Depression is the worst – phase of the ‘business cycle Extreme point of depression is called ” trough ” An economy that fell down in trough could not come out from this without external help.

iv) Recovery – This is the turning point from depression to revival towards an upswing. It begins with the revival of demand for capital goods. Autonomous investments boost the activity. Recovery may be initiated by innovation or investment or by government expenditure.

Question 1.
During Inflation?
(b) Wage earners gain
(c) Salary gain
(d) Renters gain

Question 2.
The history of the Barter system starts in
a) 6000 B.C
b) 5000 B.C
c) 7000 B.C
d) 2500B.C
a) 6000 B.C

Question 3.
The modem economy is described as –
(a) Demand Economy
(b) Supply Economy
(c) Money Economy
(d) Wage Economy
(c) Money Economy

Question 4.
Indian currency symbol f was designed by ……..
a) Manmohan singh
b) Raguram Raj an
c) Arvind panakariya
d) Udayakumar
d) Udayakumar

Question 5.
Currency notes in circulation are referred to as –
(b) Fiat money
(c) Value of money
(d) Cheap money
(b) Fiat money

Question 6.
……………………………….. money consists of vault cash in banks and deposits of commercial banks with RBI
a) Reserve deposit Ratio
b) Currency Deposit Ratio
c) Cash Reserve Ratio
d) Statutory Liquidity Ratio
a) Reserve deposit Ratio

Question 7.
“The Purchasing Power of Money” is a book written by ……………………
a) Marshall
b) Keynes
d) Irving Fisher
d) Irving Fisher

Question 8.
Which is the most important function of money?
(a) Measure of value
(b) Store of value
(c) Medium of exchange
(d) Standard of deferred payments
(c) Medium of exchange

Question 9.
Inflation is “A state of abnormal increase in the quantity of purchasing power” is said by
a) Coulbourn
b) Walker
c) Gregory
d) Fisher
c) Gregory

Question 10.
What is the cheap money policy?
(a) High rates of Interest
(b) Low rates of Interest
(c) Medium rates of Interest
(d) Very high rates of Interest
(b) Low rates of Interest

Question 11.
………………………….. inflation occurs when banks are liberal in lending credit.
a) Currency inflation
b) Profit induced inflation
b) Credit inflation
d) Scarcity induced inflation.
c) Credit inflation

Question 12.
The extreme point of depression is called as ……………..
a) Recession
b) Trough
c) Depression
d) None of the above
b) Trough

Question 13.
Monetary policy is usually effective in controlling –
(a) Bank
(b) Inflation
(c) Deflation
(d) Stagflation
(b) Inflation

II. Match the following

Question 1.
A) Barter system – 1) Managed currency standard
B) Metallic standard – 2) Commodities
C) Paper currency standard – 3) Smart cards
D) Plastic money – 4) Coins

a) 2 4 1 3

Question 2.
A) Primary function – 1) Basis of credit system
B) Secondary function – 2) Liquidity
C) Contingent function – 3) Medium of exchange
D) Other function – 4) Store of value

c) 3 4 1 2

Question 3.
A) Creeping Inflation – 1) 20-100%
B) Walking Inflation – 2) Moderate inflation
C) Running Inflation – 3) 3-9 %
D) Galloping Inflation – 4) 10-20%

d ) 2 3 4 1

III. Choose the correct pair

Question 1.
a) Cash Deposit Ratio – CRR
b) Reserve Deposit Ratio – RDR
c) Cash Reserve Ratio – SLR
d) Statutory Liquidity Ratio – CDR
b) Reserve Deposit Ratio – RDR

Question 2.
a) Money is what money does – Crowther
b) Money – Medium of Exchange
c) Plastic currency – Managed currency standard
d) Cryptocurrency – Credit card
b) Money – Medium of Exchange

Question 3.
b) M4 – Narrow money
c) MV = PT
d) n – P (K + rk1)
c) MV = PT

IV. Choose the incorrect pair

Question 1.
In the equation MV = PT
a) M – Quantity of money
b) V – Velocity of money
c) P – Price level
d) T – Volume of Trade
d) T – Volume of Trade

Question 2.
a) Quantity theory of money – J.M. Keynes
b) Keynes Equation – n = pk
c) Marshall’s Equation – M = KPY
d) Purchasing power of money – Irving Fisher
a) Quantity theory of money – J.M. Keynes

Question 3.
a) Paper currency – Reserve Bank
b) Coins – Ministry of finance
c) Currency symbol -?
d) M4 – Narrow money
d) M4 – Narrow money

V. Choose the correct Statement

Question 1.
a) The total amount of money is an economy denotes the demand for money.
b) Money supply refers to the amount of money which is in circulation in an economy at any given time.
c) Inflation is “A state of abnormal increase in the quantity of purchasing power.” Coulbourn.
d) The rate of Inflation is almost 20 to 100% per annum, it is called walking Inflation.
b) Money supply refers to the amount of money which is in circulation in an economy at any given time.

Question 2.
a) When banks are liberal in lending credit, the money supply increases which is called credit inflation.
b) During inflation, debtors are the losers.
c) The fiscal measures to control inflation are adopted by the Central Bank.
d) During deflation prices rise.
a) When banks are liberal in lending credit, the money supply increases which is called credit inflation.

Question 3.
a) During Boom the demand for bank credit decreases.
b) The turning point from the boom condition is called Depression.
c) Money is an asset that is generally accepted as a medium of Exchange.
d) An increase in business activities after the lowest point is called a Recession.
c) Money is an asset that is generally accepted as a medium of Exchange.

VI. Choose the Incorrect Statement.

Question 1.
a) “Money is what money does” – Walker.
b) Phoenicians adopted bartering of goods with various other cities across oceans.
c) In the Gold standard the monetary unit is defined in terms of a certain weight of gold.
d) In India currency in circulation is being controlled by the central Government.
d) In India currency in circulation is being controlled by the central Government.

Question 2.
a) The operation of cryptocurrency is controlled by the Central Bank.
b) Money is the basis of the credit system.
c) Money is the most liquid form of capital.
d) Fisher’s equation (MV=PT) is also called as “Equation of Exchange”.
a) The operation of cryptocurrency is controlled by the Central Bank.

Question 3.
a) M1 – Currency, coins, and demand deposits
b) M2 – M1 + Savings deposits with post office savings banks.
c) M3 – M1 + Time deposits of all commercial and cooperative banks.
d) M4 – M3 + Total deposits with post offices.
c) M3 – M1 + Time deposits of all commercial and co-operative banks.

Pick the odd one out:

Question 1.
a) M1
b) M5
c) M3
d) M4
b) M5

Question 2.
a) CDR
b) RDR
c) SDR
d) CRR
c) SDR

Question 3.
a) Cost-Push inflation
b) Creeping inflation
c) Walking inflation
d) Running inflation
a) Cost-Push inflation

VIII. Analyse the Reason

Question 1.
Assertion (A) : Plastic money is an alternative to cash or standard money.
Reason (R) : Plastic money refers to the hard plastic cards used every day in place of actual banknotes.
b) Assertion (A) and Reason (R) both are true, but (R) is not the correct explanation of (A).

Question 2.
Assertion (A) : Money acts as a collective measure of value,
Reason (R) : The prices of all goods and services are expressed in terms of money.
a) Assertion (A) and Reason (R) both are true, and (R) is the correct explanation of (A).

Option:
a) Assertion (A) and Reason (R) both are true, and (R) is the correct explanation of (A).
b) Assertion (A) and Reason (R) both are true, but (R) is not the correct explanation of (A).
c) (A) is true but (R) is false.
d) (A) is false and (R) is true.

IX. 2 Mark Questions:

Question 1.
Define “Silver Standard”?
Silver Standard: The silver standard is a monetary system in which the standard economic unit of account is a fixed weight of silver. The silver standard is a monetary arrangement in which a country’s Government allows the conversion of its currency into a fixed amount of silver.

Question 2.
When and by whom Barter system introduced?

1. The Barter system was evolved in 6000 BC.
2. The barter system was introduced by Mesopotamia tribes.

Question 3.
What is the silver standard?
The silver standard is a monetary system in which the standard economic unit of account is a fixed weight of silver.

Question 4.
Write RBI publishes information alternative measures of the money supply?
RBI publishes information for four alternative measures of Money supply, namely M1, M2 and M3, and M4
M1 = Currency, coins, and demand deposits.
M2 = M1 + Savings deposits with post office savings banks.
M3 = M2 + Time deposits of all commercial and cooperative banks.
M4 = M3 + Total deposits with Post offices.

Question 5.
What is CryptoCurrency?
Cryptocurrency is a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.

Question 6.
State the meaning of Inflation.
Inflation is a consistent and appreciable rise in the general price level.

Question 7.
Write Fisher’s Quantity Theory of money equation?

1. The general form of the equation given by Fisher is MV = PT.
2. Fisher points out that in a country during any given period of time, the total quantity of money (MV) will be equal to the total value of all goods and services bought and sold (PT).
3. MV = PT

Question 8.
State Marshall’s equation in Cambridge Approach.

• M = KPY
• M – Quantity of Money
• Y – aggregate real income of the community
• P – The purchasing power of money
• K – Fraction of the real income which the public desires to hold in the form of money.

Question 9.
What is creeping Inflation?
Creeping Inflation is slow-moving and very mild. The rise in price will not be perceptible but spread over a long period.

Question 10.
What is Galloping inflation?
Galloping inflation or hyperinflation points out to unmanageably high inflation rates that run ipto two or three digits.

Question 11.
What is Demand-pull Inflation?
If the demand is high for a product and supply is low, the price of the products increase. This is called Demand-pull inflation.

Question 12.
What is cost-push inflation?
When the cost of raw materials and other inputs rises inflation results. An increase in wages paid to labour also leads to inflation.

Question 13.
What is Deflation?
Deflation is a situation of falling prices, reduced money supply, and unemployment.

Question 14.
What is Stagflation?
The co-existence of a high rate of unemployment and inflation.

X. 3 Mark Question

Question 1.
Write the meaning of Money supply?
Meaning of Money Supply:

1. In India, currency notes are issued by the Reserve Bank of India (RBI), and coins are issued by the Ministry of Finance, Government of India (GOI).
2. Besides these, the balance is savings, or current account deposits, held by the public in commercial banks is also considered money.
3. The currency notes are also called fiat money and legal tenders.

Question 2.
Explain the measures of the money supply.

• M1 – Currency, coins, and demand deposits
• M2 – M1 + Savings deposits with post office savings banks.
• M3 – M2 + Time deposits of all commercial and cooperative banks.
• M3 – M4 + Total deposits with post offices.
• M1 and M2 are known as narrow money
• M3 and M4 are known as broad money

Question 3.
What is the meaning of the trade cycle?

1. A Trade cycle refers to oscillations in aggregate economic activity particularly in employment, output, income, etc.
2. It is due to the inherent contraction and expansion of the elements which energize the economic activities of the nation.
3. The fluctuations are periodical, differing in intensity and changing in its coverage.

Question 4.
Write a note on Irving Fisher.

• The quantity theory of money is a very old theory. It was first propounded in 1588 by an Italian economist, Davanzatti.
• The credit for popularizing this theory belongs to the well-known American economist, Irving Fisher who published the book, “The purchasing power of Money” in 1911.
• He gave it a quantitative form in terms of his famous ” Equation of Exchange”.

Question 5.
Explain wage Price spiral in inflation.

• Wage – Price spiral is used to explaining the cause and effect relationship between rising wages and rising prices or inflation.
• If wages increases, demand for the products increases which results in a price increase and causes inflation.
• Wages increase because of the increase in general price level and the cost of production increase which further increases the price level and creates a spiral.

XI. 5 Mark Question

Question 1.
Explain the Measures of control inflation?
Measures to Control Inflation:
Keynes and Milton Friedman together suggested three measures to prevent and control inflation.

• Monetary measures
• Fiscal measures (J.M. Keynes) and
• Other measures.

1. Monetary Measures: These measures are adopted by the Central Bank of the country. They are

• Increase in Bankrate
• Sale of Government Securities in the Open Market
• Higher Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)
• Consumer Credit Control and
• Higher margin requirements
• Higher Repo Rate and Reverse Repo Rate.

2. Fiscal Measures:

• Fiscal policy is now recognized as an important instrument to tackle an inflationary situation.
• The major anti-inflationary fiscal measures are the following:
• Reduction of Government Expenditure and Public Borrowing and Enhancing taxation.

3. Other Measures: These measures can be divided broadly into short-term and long-term measures.

(a) Short-term measures can be in regard to public distribution of scarce essential commodities through fair price shops (Rationing). In India whenever a shortage of basic goods has been felt, the government has resorted to importing so that inflation may not get triggered.

(b) Long-term measures will require accelerating economic growth especially of the wage goods which have a direct bearing on the general price and the cost of living. Some restrictions on present consumption may help in improving saving and investment which may be necessary for accelerating the rate of economic growth in the long run.