Money and Banking Class 12 Notes

Money and Banking are important aspects of everyone’s day to day life. There is a lot more to the concept of money than we usually understand. The 6th chapter of class 12th macroeconomics talks about money and banking in complete depth. Not only this, the chapter carries a lot of weightage as well. Read this blog further to revise Money and Banking Class 12 notes, summary and NCERT solutions.

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Definition of Money

Money is defined as a standard of deferred payment and has some value which is accepted as a medium of exchange. 

Functions of Money

As per Money and Banking Class 12 notes, functions of money can be further classified into three categories:

Primary Functions	Secondary Functions	Contingent Functions
Medium of Exchange	Store of Value	Liquidity
Common Unit of Value	Transfer of Value	Basis of Credit
	Standard of Deferred Payment	Basis of Price Mechanism

Also Read: Class 12 Forms Of Market And Price Determination

What is the Barter System?

Barter system implies a direct exchange of goods and services without any use of money. For eg. A wants to buy a car from B and B sells that car to A in exchange for his television. This example involves the exchange of goods and services without any exchange of money.

Limitations of Barter System

• Lack of divisibility
• Lack of double coincidence of wants
• Lack of standard of deferred payment
• Difficulty in exchange of goods and services
• Lack of common measure of value

Check Out: Maths Project Class 12

Money Supply

Money supply is defined as the sum total of all the currency as well as other liquid instruments in an economy at a given point of time. According to Money and Banking Class 12 notes, the key question asked is “What are the Measures of Money Supply?”

Measures of money supply: Currency held by public + net demand deposits held by commercial banks.

M1= currency in the hands of public + demand deposits of public with banks + other deposits
M2= M1 + post office saving deposits
M3= M1 + time deposits of commercial banks
M4= M3 + sum total of post office savings saving organisation deposits excluding deposits on NSC.

Features of Money Supply

Here are the major features of Money Supply that you must study in our Money and Banking Class 12 notes:

• The money supply is based on the stock concept which means it calculates the volume of money held by the public at a given point in time. 
• It doesn’t include any money held by the governments, commercial banks or central banks.

Banking

Money and Banking Class 12 notes also elaborate on the concept of banking, types of banks, their functions, amongst others.

Commercial Banks

Commercial banks are defined as the financial institution which accepts deposits from the general public and then uses those funds to offer advance loans for various purposes with the objective of profit maximisation. 

Functions of Commercial Banks

Here are the primary and secondary functions of commercial banks that we will study in Money and Banking Class 12 notes:

Primary Functions

1. Accepting deposits
2. Discounting Bill of Exchange
3. Advancing loans

Secondary Functions

Secondary functions of commercial banks can be classified further into two categories-

Agency Function	General Utility Function
Collection of funds	Underwriting securities
Transfer of funds	Issue of travelers cheque
Collection of interest and dividend	Sale and purchase of foreig exchange
Sale and purchase of shares as well as securities on behalf of their customers	Safe custody of goods in lockers
Payment of insurance premium and bills on behalf of their customers.

Central Banks

Central banks are defined as the apex financial institutions who have control over creation and distribution of money as well as credit creation. As per the study notes on Money and Banking, Central banks are responsible for managing the banking system of the whole country as well as work towards creating monetary policies. 

Functions of Central Banks

• Oversee the monetary system of the whole country
• Issue of currency
• Bank of issue
• Lender of last resort to commercial banks
• Lender of last resort to the government
• Credit controller
• Custodian of foreign exchange services

Credit Creation/Money Creation

As already discussed above, banks accept deposits and use these deposits in order to advance loans for various purposes with the objective of profit maximisation. The next topic in our Class 12 notes on Money and Banking is Credit Creation or Money Creation which is simply the process of advancing loans to the general public.

The process of credit creation/money creation by the commercial banks depends on the following two factors- 

• Amount of primary deposits
• Legal reserve ratio

What is the Legal Reserve Ratio?

Legal reserve ratio is defined as the minimum ratio of the deposits which is legally required to keep in cash by the banks. The Class 12 chapter on Money and Banking notes that Legal reserve ratio can further be divided into two sub categories-

1. Cash Reserve Ratio- cash reserve ratio is that part of the legal reserve ratio which the banks have to keep with the central bank.
2. Statutory Liquidity Ratio- statutory liquidity ratio is that part of the legal reserve ratio which the banks have to keep within their bank itself.

What is Repo Rate?

Repo rate is defined as the rate at which the central bank of the country lends money to commercial banks in case of shortage of funds so as to maintain the liquidity. To simplify in our Class 12 notes on Money and Banking, the percentage of the amount which the commercial banks have to pay to the central bank is called the repo rate. 

Central banks usually increase the repo rate during inflation which ultimately helps in reducing the money supply and helps in controlling inflation.

What is Reverse Repo Rate?

Reverse repo rate is defined as the rate at which central banks borrow from the commercial banks of the country. It is a mechanism to absorb the liquidity so as to reduce the powers of the investors. The amount which the central banks have to pay to the commercial banks is known as reverse repo rate.

Central banks generally increase the reverse repo rate when there is a need for reducing the money supply in the market as this gives commercial banks an incentive to park their funds with the central bank.

Check Out: Economics Project for Class 12

Thus, we hope that our study notes on Class 12 Money and Banking help you prepare for this chapter in a comprehensive way. Hoping to pursue a career in economics? Get in touch with Leverage Edu experts to get complete assistance in choosing the right course and get admission in your dream university. Sign up for a free session with us now!