AHSEC| CLASS 11| FINANCE| SOLVED PAPER - 2019| H.S. 1ST YEAR
2019
FINANCE
Full Marks: 100
Time: 3 hours
The figures in the margin indicate full marks for the questions.
1. Answer the following:
(A) Fill in
the blanks: 1x2=2
(a) Reserve
Bank of India was established on 1st April 1935.
(b) Overdraft
facility is given against the Current Accounts
only.
(B) Write
full form of the following abbreviations: 1x2=2
(a) IDBI
Ans:- Industrial Development Bank of India.
(b) ATM
Ans:- Automated teller machine.
(C) Choose
the correct answer from the alternatives given below: 1x2=2
(a) Which of
the following departments is not considered as department of a bank-
(i) Advance
Department
(ii)
Establishment Department
(iii) Cultural Department
(iv) Cash
& Clearing Department
(b) Which
system of Note Issue was followed by the Reserve Bank of Indian till 1956?
(i) Minimum Reserve System
(ii)
Percentage Deposit System
(iii)
Proportional Reserve System
(iv) Upto
Paid-up capital
(D) Write
'True' or 'False': 1x2=2
(a) The
customer is the main beneficiary of the Internet Banking. True
(b) The
presidency banks were established under the Charter of East Indian Company. True
2. Write the meaning of Bank. 2
Ans:- The definition of bank goes to a financial
institution authorized to accept deposits and provide credit. These
institutions can also provide financial assistance such as: Capital Management.
foreign currency.
A bank is a
financial institution that deals with money and credit. Different scholars have
given different definitions of banks.
Dr. H.L.
According to Hart, “A banker is one who in the ordinary course of business
honours checks drawn on persons from whom he receives money on current
account.”
Section 5 of the
Banking Regulation Act, 1949 defines banking as "Accepting for the purpose
of purchasing and investing, deposits of money from the public, repayable on
demand or otherwise and withdrawing by cheque, draft, order or otherwise".
3. Give short note on Recurring Deposit Account. 2
Ans:- This is another form of fixed deposit. A fixed
amount (not less than Rs.5.00) is deposited every month in this account for a
period of 12 to 60 months or more. It is also known as Cumulative Deposit
Account. The rate of interest is almost at par with the fixed deposit rates.
4. What is Debit Card? 2
Ans:- Debit card also called plastic cash, is issued
by banks and is used for purchases in daily life. It is used to withdraw cash
at ATMs and other online and offline store purchases.
5. Define Trade Cycle. 2
Ans:- A business cycle refers to fluctuations in
economic activity, especially in employment, production and income, prices,
profits, etc. It has been defined differently by different economists.
According to Mitchell, “The business cycle is the ups and downs in the economic
activities of organized communities.
6. What is Land Development Bank? 2
Ans:- These banks provide long-term loans to
agriculture for purposes such as pump sets, tractors, digging wells, land
reclamation, etc. These banks raise their resources mainly by floatation of
debentures subscribed by State Bank Group, Commercial Banks, LIC. RBI. These
banks give loans to the farmers on the security of their land. Land development
banks cannot strictly be called banking institutions as they are not required
to raise deposits and maintain cash reserve ratios.
7. Write the names of three private sector banks. 3
Ans: - Name of three private sector banks are:
(i) HDFC bank.
(ii) ICICI bank.
(iii) AXIS bank.
8. Briefly explain the principles of Note Issue of Reserve
Bank of India. 3
Ans:- For currency issuance, the RBI currently
follows the minimum reserve system. Minimum Reserve System (MRS) is followed
since 1956.
Under the
minimum reserve system, the RBI must maintain a minimum reserve of Rs 200 crore
consisting of gold coins and gold bullion and foreign currencies. Out of the
total Rs 200 crore, Rs. 115 crores should be in the form of gold coins or gold
bullion.
The purpose of
adopting this system was to expand the money supply to meet the growing
transaction needs in the economy.
In accordance
with these principles of note issue, notes are issued against gold reserves.
Paper currency is a suitable alternative to metallic currency. Paper money
should have one hundred percent of the gold reserves. If compared to paper
money there is a shortage of gold reserves.
9. Write three features of Savings Bank Account. 3
Ans:- The three features of a savings bank account are:
(a) Interest
Rates: The way your savings will grow is with a competitive interest rate
with a savings account, the financial institution offers a standard variable
interest rate per annum.
(b) Bonus
Incentive: A bonus rate is offered on top of the base rate if a specified
criterion is met. This often requires that we deposit a limited number of
withdrawals as well as a minimum withdrawal per month.
(c)
Promotional interest rate: This rate is usually for a limited period before
the account reverts to the standard variable interest rate.
10. State why Central Bank is known as 'lander of last
resort'. 3
Ans:- The central bank is referred to as the lender
of last resort because it protects banks from potential failure and protects
the banking system from potential breakdown. If commercial banks fail to meet
their financial requirements from other sources, they may approach the central
bank for loans as a last resort.
The central bank
is called the lender of last resort because it can lend – and must lend to
prevent the failures of solvent banks – in periods when no other lender is either
able to lend or has been prevented from lending. Willing to lend a substantial
amount or eliminate a financial panic.
11. Give a short note on 'Insurance of Bank
Deposit'. 3
Ans:- It provides deposit insurance which works as a
security cover for the bank deposit holders when the bank fails to pay its
depositors. The agency insures all types of deposit accounts of a bank, such as
savings, current, recurring, and fixed deposits to the extent of Rs. 5 lakh per
account holder per bank.
12. Discuss the objectives of Credit Control of Central
Bank. 5
Ans:- Objectives of Credit Control The main objectives of
credit control are given below:
(a) Price
Stability: Violent price fluctuations cause disturbances and maladjustments
in the economic system and have serious social consequences. Therefore, price
stability is an important objective of credit control policy. The central bank
can bring price stability in the country by regulating the supply of credit
according to the business needs of the people.
(b) Economic
stability: The operation of the business cycle brings instability in the
capitalist economy. The central bank's credit control policy should aim at
eliminating cyclical fluctuations and ensuring economic stability in the
economy.
(c)
Maximization of Employment: Unemployment is economically wasteful and
socially undesirable. Therefore, economic stability with full employment and
high per capita income has been considered as an important objective of the
country's credit control policy.
(d) Economic
Development: The main objective of credit control policy in underdeveloped
countries should be to promote economic development in the shortest possible
time. These countries usually suffer from lack of financial resources.
Therefore, the central banks of these countries should address the problem of
financial scarcity through a planned expansion of bank credit.
(e)
Stabilization of the money market: Another objective of the credit control
policy of the central bank is to stabilize the money market so that
fluctuations in interest rates can be minimized. Credit control should be
exercised in such a way that a balance between the demand and supply of money
is always maintained.
(f) Exchange
Rate Stability: Exchange rate stability can also be an objective of credit
control policy. Fluctuation in exchange rates is detrimental to the country's
foreign trade. Thus, in countries primarily dependent on foreign trade, the
central bank through its credit control policy should try to eliminate
fluctuations in foreign exchange rates.
Or
Discuss in
brief the Inspection and Supervision functions of Central Bank. 5
Ans:- It supervises, regulates and controls the
activities of commercial banks. It provides centralized clearing and remittance
facilities to commercial banks. The Central Bank acts as the controller of
credit. For this purpose, it adopts quantitative and qualitative methods of
credit control.
Under this
function, RBI may undertake periodic inspection/audit of commercial banks,
filing of reports by commercial banks and other statutory compliances. The
central bank may take necessary corrective and punitive action against banks
due to deficiencies in regulatory compliance.
13. Discuss the advantages of Internet Banking from
customers' point of view. 5
Ans:- Advantages of Internet Banking are:
(a) Online
account is easy to open and easy to operate.
(b) It is quite
convenient as you can easily pay your bills, transfer funds between accounts,
etc.
(c) It is
available all the time, i.e., 24×7. You can do your tasks from anywhere and at
any time, even at night when the bank is closed or on holidays.
(d) It is fast
and efficient; money gets transferred from one account to another very quickly.
(e) Through
Internet Banking, you can always keep track of your transactions and account
balance. This feature also keeps your account secure.
14. Describe five characteristics of Trade Cycle. 5
Ans:- Characteristics of Trade Cycle:
(i) It is a wave
like motion.
(ii) Cyclical
fluctuations are periodic in nature.
(iii) Expansion
and contraction in a business cycle are cumulative in effect.
(iv) Business
cycles are omnipresent in their effects.
(v) A business
cycle is characterized by the presence of crisis.
Or
Explain in
brief the various phases of Trade Cycle.
5
Ans:- A
business cycle is generally divided into four phases viz.
(a)
Prosperity: Economic activities are expanding from a revival phase to an
upward trend. So, the revival of upward trend in the economy is the starting
point of prosperity. This stage is characterized in the following way.
(i) High level of
production and trade.
(ii) High level
of effective demand.
(iii) Higher
level of employment and income
(iv) Rising
structure of interest rate.
(v) A large
expansion of bank credit.
(vi) High
marginal efficiency of capital.
(vii) A price
inflation
(viii) Overall
business optimism.
(ix) The tendency
of an economy to operate almost at full capacity along the production
possibilities frontier.
(b)
Recession: When prosperity ends, recession begins. It is related to a
turning point rather than a phase. During prosperity, investment, production,
employment, reaches the maximum extent. Cut-throat competition arises on raw
material, labour, capital etc. As a result, the cost of production increases
and the profit margin decreases. Since the goods are available in the market,
there is no possibility of selling the goods in the market. The confidence of
businessmen wavers. Everyone feels pessimistic about the future profitability
of investments. Therefore, there will be a drastic reduction in investment and
production of capital goods industries will fall.
(c) Depression:
It starts from the stage of recession. Business activity in the country is well
below normal in this phase. It is characterized by a sharp reduction in output,
mass unemployment, low employment, falling prices, falling profits, low wages,
contraction of credit, high rates of business failures, and an atmosphere of
all-round despair and hopelessness. The decline in production or output is
accompanied by a decrease in the amount of employment. The prices of
manufactured goods fall. level. The producers must bear huge financial losses.
Many of these firms have had to close due to accumulated losses.
(d)
Recovery or Revival: It refers to the increase in business activity after
reaching the lowest point of depression. During this phase, initially, there is
a slight recovery in economic activities. Entrepreneurs begin to realize that
the economic situation is not as bad as it was in the earlier stages. This
leads to further improvement in business activity. Industrial production grows
slowly and gradually. The amount of employment also increases continuously.
There has been a slow, but steady rise in prices with a marginal increase in
profits. Wages also rise, though they do not rise in the same proportion as
prices. Attracted by rising profits, new investments are made in capital goods
industries. Banks extend credit. Merchandise also starts increasing gradually.
The pessimism and gloom of the operating period has been replaced by an
atmosphere of all-round cautious hope.
15. What types of complaints are to be looked by Banking
Ombudsman relating to banking services? (mention any five) 5
Ans:- There are the following types of complaints:
(a) Delay in
payment or non-payment of inward remittance or collection of cheques, drafts,
bills etc.
(b) failure to
issue or delay in issue of dropship orders or banker's cheques.
(c) Closure of
account without concern of the customer.
(d) Refusal to
close Delay in closing of accounts.
(e) Financial
loss caused to the customer due to incorrect information provided by the bank
official.
16. Describe the features of Regional Rural Bank. 5
Ans:- Some of the features of Regional Rural Banks are:
(i) The area of
operation of a rural bank is limited to a specified area consisting of one or
more districts.
(ii) These banks
cannot have a lending rate which is higher than the prevailing lending rate of
co-operative credit societies in a particular state.
(iii) The pay
structure of the employees of these banks has been fixed in line with the pay
structure of State Government employees, local officers of comparable level and
status in the region.
(iv) These are
public sector banks. The paid-up capital of each bank is Rs. 25 lakhs. 50 per
cent of the capital is contributed by the Central Government. The concerned
state government contributes 15 per cent. 35 per cent is contributed by the
sponsoring public sector commercial banks.
17. Write about the operating system of credit card. 5
Ans:- Credit card operating systems are:
(i) Insert the
ATM card into the machine as instructed and wait till the machine prompts to
key in the PIN.
(ii) Wait for a
few seconds till the PIN is processed by the machine.
(iii) Then enter
the amount of cash required.
(iv) Wait for a
few seconds till the ATM card comes out, count the cash and always remember to
take this card before leaving.
Or
Write the
procedure of use of ATM Card. 5
Ans:- ATM
(Automated Teller Machine): ATM is a new electronic device to serve bank
customers. It is an attempt to replace the person managed teller counter. But
unlike teller counter, ATM is on customer service round the clock. It provides
money anytime anywhere in any branch where the account is maintained. The card
is non-transferable and can be cancelled by the issuing bank without assigning
any reason.
ATM service to
withdraw cash against the balance already available in the card holder's account.
A card holder can withdraw certain minimum and maximum amount per day as
decided by the bank. The Cardholder can view the balance in his/her accounts
linked to the ATM Card on the screen as well as receive transaction receipts
showing the balance. The cardholder can withdraw money from any ATM provided
his account is linked to the computer at any other branch.
18. State on brief the procedure of opening a bank
account in the name of a minor. 5
Ans:- A person who has not attained or completed the
age of 18 years is known as a minor. A minor is not capable of making a valid
contract and a contract made by a minor is void. The bank can open a savings,
fixed or recurring deposit account in the name of a minor.
Following are
the main steps to open a bank account:
(a) Age for
opening an account: A banker should allow a minor to open a savings bank
account in his own name only if he is between 10-14 years of age and can read
and write in English, Hindi or any other language. other language. If the minor
has such a quality, the banker must open his account in the joint name of the
minor and his guardian.
(b)
Selection of Account Type: The first step is to select the type of account
to be opened. An account can be of many types like Current, Savings Fixed Account.
The account can be opened jointly or singly. A banker can open a savings bank
account in the name of a minor. The banker should not open a current account in
the name of a minor.
(c) Bank
and Branch Selection: The prospective account holder should now select the
bank.
(d)
Obtaining Account Opening Form: The account opening form is obtained from
the bank. It should be read carefully and filled with utmost care.
(e)
Obtaining references: One or two references are obtained by the prospective
account holder. People who give references sign the form and give their account
number. and name and address.
(f) Form
Submission: Now the form should be submitted along with the required
documents. These documents differ from account to account.
(g) Giving Specimen
Signature: Now, the account holder signs a card which is called Specimen
Signature Card. These signatures are matched with the check of the account
holder.
(h) Making
Initial Deposit: The applicant is allotted an account and is asked to make
an initial deposit in his account through a deposit slip.
(i) Account
is opened: The account is opened as soon as the initial deposit is made.
(j) Receipt
of Check Book / Fixed Deposit Certificate: Finally, a check book is issued
which contains the account number of the applicant. Money can be withdrawn with
the help of these cheques.
19. Discuss briefly the management system of Reserve Bank
of India. 8
Ans:- The general superintendence and direction of
the affairs of the Reserve Bank of India is vested in the Central Board of
Directors, which consists of 20 members:
(a) A Governor
and four Deputy Governors appointed by the Central Government.
(b) Four
directors nominated by the Central Government.
(c) Ten other
directors and
(d) A government
officer nominated by the Central Government.
The Governor of
the Reserve Bank of India serves as the chairman of the central board of
directors of the bank and its chief executive authority. The Governor can
exercise all those powers which can be exercised by the Bank under the Act.
However, his powers are subject to the rules made by the Central Board of
Directors from time to time. In the performance of his duties, he is assisted
by deputy governors and executive directors. Each deputy governor is
responsible for certain specific functions of the bank. The Lieutenant Governor
is appointed by the Central Government for a period not exceeding 5 years. He
is eligible for reappointment. He is a full-time officer of the Bank.
Board of
Directors (20 members): Governor (one) → Deputy Governor (four) → Directors
(four) → Executive Directors (ten) → Government officials nominated by the
Central Government (one)
There are local
boards for different regions of the country such as western, eastern, northern,
and southern regions. The headquarters of the local hoards are located at
Mumbai, Kolkata, Chennai, and New Delhi. Each local board consists of five
members and they are appointed by the central government for a term of four
years.
Or
Discuss the
evolution and growth of banking in India.
8
Ans:- Modern joint stock commercial banking in India dates back to the early 19th century. The early commercial banks were known as agency houses and were started by employees of the East India Company. Bank offices were largely confined to the port cities of Bombay, Calcutta and Madras (now Mumbai, Kolkata, and Chennai). Agency houses were primarily trading establishments and combined banking and trading functions. Many banks were established mainly by the English Agency Houses based on unlimited liability.
Alexander and
Company established the first joint stock, The Bank of Hindustan, in Calcutta
in 1770. It was finished in 1832. Banks set up by agency houses failed due to
mismanagement and speculation. Hence to revive the situation, the East India
Company established the Bank of Bengal in 1809, the Bank of Bombay in 1840 and
the Bank of Madras in 1843. These banks were known as Presidency Banks. In
1860, an act was passed allowing the establishment of banks on a limited
liability basis. The creation of joint stock banks was very slow from 1865
until the end of the 19th century. Some banks like the Allahabad Bank were
started during the last quarter of the 19th century. The Avadh Commercial Bank
and the flotation were followed by a banking crisis during 1913–17.
In 1920, the
"Imperial Bank of India Act" was passed to amalgamate the three
Presidency banks. The Imperial Bank of India was established in 1921 by merging
three Presidency banks. The bank was empowered to hold government funds and
manage the public debt.
The Second
World War brought a radical change in the Indian banking system. Heavy wartime
expenditure resulted in an increase in bank deposits. The banking scenario in
India completely changed after independence. The entire system registered rapid
progress. The change became possible with the passing of the Banking Regulation
Act 1949. It is considered a major milestone in the history of commercial
banking in India. This act was passed with the aim of strengthening and
regulating the banking system in India. The State Bank of India was established
in 1955 by nationalizing the Imperial Bank of India. In 1959, the State Bank of
India and its Associates Act was passed and accordingly the public sector banks
were expanded. Fourteen (14) major Indian commercial banks were nationalized in
1969 and six more banks were nationalized in 1980. National Bank for
Agriculture and Rural Development (NABARD) was established in 1982 for the
development of agriculture sector.
Another
development of banking institutions in India is the establishment of various
industrial development banks to facilitate industrial development and balanced
economic growth. Such institutions are IDBI, IFCI, LIC, ICICI, IDBI, SFC etc.
Exim Bank was
established in 1982 with the objective of financing and promoting India's
foreign trade.
20. Describe the principles of Central Bank. 8
Ans:- Principles of Central Banking:
(i) The central
bank of a country enjoys a special status in the banking structure of the
country. The principles on which a central bank is run are different from
normal banking principles. An ordinary bank is run for profit.
(ii) On the
other hand, a central bank is primarily meant to promote the financial and
economic stability of the country. De Kock says "the guiding principle of
a central bank" is that it should act only in the public interest and for
the welfare of the country, and about profit as a primary consideration. Profit
making is thus a secondary consideration for a central bank.
(iii) The
central bank is not a profit-making institution as such. It does not act as a
competitor to other banks. In fact, it is a monetary authority of the country
and it must function in such a way that promotes economic stability and growth.
(iv) The
functions of the central bank, especially the Reserve Bank of India, have
increased tremendously in recent years. The Reserve Bank of India not only
regulates credit and money supply in the country but it also promotes economic
growth and price stability. The guiding principle of the Reserve Bank is to
operate most of its instruments in a manner that serves the objectives of economic
policy laid down by the government and the Planning Commission.
Or
Explain four
important points of difference between Central Bank and Commercial Bank. 8
Ans:-
Important points of difference between Central Bank and Commercial Bank are:
Central
bank:
(a) The central
bank is the apex body of the monetary and banking system of the country.
(b) The Central
Bank controls the monetary system and the overall credit operations of the
banks.
(c) The central
bank is not a profit-making institution.
(d) The central
bank is usually owned by the state.
(e) The central
bank is closely related to the government as its banker, agent, and advisor.
(f) The central
bank helps in the establishment of financial institutions to strengthen the
money and capital market in the country.
(g) The Central
Bank has the monopoly to issue notes.
Commercial
Bank:
(a) Commercial
bank is only a constituent unit of the banking system.
(B) The
commercial bank is subordinate to the central bank.
(c) Commercial
bank is a profit-making institution.
(d) Commercial
banks are mostly privately owned.
(e) Commercial
banks act as bankers and advisors to the general public.
(f) Commercial
bank helps industry by underwriting shares and debentures.
(g) This right
is no longer with the commercial banks.
21. Discuss the causes of inflation. 8
Ans:- The causes of inflation are:
Inflation is
caused by many factors, here are some:
(i) Money
Supply: Excess money (money) supply in the economy is one of the primary
causes of inflation. This happens when the supply/circulation of money in a
country outpaces the economic growth, therefore depreciating the value of the
currency. In the modern era, countries have shifted from traditional methods of
valuing money with the amount of gold they hold. Modern methods of valuing
money are determined by the amount of currency in circulation, which in turn is
determined by the public's perception of the value of that currency.
(ii)
National Debt: There are many factors that affect the national debt,
including the borrowing and spending of nations. In a situation where a
country's debt increases, the country concerned is left with two options: Taxes
can be increased internally. Additional money can be printed to pay off the
debt.
(iii)
Demand-Pull Effect: The demand-pull effect states that as wages rise in an
economy in a growing economy, people will have more money to spend on goods and
services. An increase in demand for goods and services will result in companies
increasing the prices that consumers will bear to balance supply and demand.
(iv)
Cost-push effect: This theory states that when companies face increased
costs on raw materials and wages to manufacture consumer goods, they pass on
the increased production costs to the final consumer in the form of increased
prices. By doing this, you will maintain your profitability.
(v)
Exchange Rates: An economy with exposure to foreign markets mostly
functions on the basis of the value of the dollar. In a trading global economy,
exchange rates are an important factor in determining the rate of inflation.
(vi)
Effects of Inflation: When there is inflation in the country, the
purchasing power of the people goes down because the prices of goods and
services are high. The value of the currency unit decreases which affects the
cost of living in the country. When the inflation rate is high, the cost of
living also increases, leading to a decline in economic growth.
However, a
healthy inflation rate (2-3%) is considered positive as it directly increases
wages and corporate profitability and maintains capital inflows into a growing
economy.
Or
Explain the
difficulties of Barter System. 8
Ans:- Money
was not used in the early history of man. Exchanges were few as each family was
self-sufficient. Whatever exchange took place took the form of barter, that is,
the exchange of goods for other goods. In barter economy people faced various
difficulties.
In a barter
economy, there was no acceptable means of payment for the direct purchase of
goods and services. In other words, in a purely barter system, there was no
generally accepted medium of exchange in the form of a particular item or asset
that could be used to buy goods and services and conduct other types of
transactions.
The
following are the main difficulties that were found in the barter system:
(i) Double
Coincidence of Wants: Due to the lack of a generally accepted medium of
exchange, a difficult problem of double coincidence of wants was faced by
persons who wanted to buy and sell goods. Individuals willing to exchange goods
in order to exchange goods are particularly in need of those goods that others
provide in return. Thus, a person who wants a good must find another person who
offers to give up the good he wants and who is willing to accept in exchange
for the good he offers.
Thus, under
the barter system, exchange of goods was possible only when there was a need to
buy and sell goods of different persons. A lot of time was spent by a person in
search of a person with whom his desires coincided. Halm rightly says, "It
is next to impossible that all the desires of persons bartering coincide as to
the kind, quality, and quantity, and value, of the things that are mutually
desired, especially in a modern In an economy in which millions of persons can
in a single day exchange millions of goods and services.”
(ii) Lack
of a standard unit of account: A barter economy lacked not only a common
medium of exchange but also a standard unit of account in which prices could be
measured and quoted. In the absence of a common unit of account, the number of
exchange ratios between commodities (that is, the prices of commodities
expressed in terms of each other) would be enormous. For example, two cows for
one horse, one cow for two quintals of wheat, one pen for three pencils, etc.
Thus, the lack of a standard unit of account with which to measure the values
of various goods and services makes exchange or trade difficult.
(iii)
Impossibility of sub-division of goods: Another problem faced under the
barter system for exchange of goods was that it was impossible to sub-division
the goods without losing their value. For example, if a person has a cow and
wants to have 5 kg of wheat, obviously, it is too expensive to give a cow for
the 5 kg of wheat required by him.
Then to do
this transaction the cow has to be divided. But the cow cannot be divided or
cut into pieces because by dividing the cow most of its value will be lost.
Thus, the impossibility of dividing goods for the purpose of exchange created a
great difficulty and hindered the development of trade.
(iv) Lack
of information: Another problem
found in the barter system was that it required a lot of information from
traders to exchange goods. For example, if Amit wants to exchange a wooden
table made by him for a saw.
Amit should
not only be able to estimate the value of the saw, but the saw maker should
also be able to determine the value of the wooden table that Amit wants to
exchange. All of this requires a lot of information about objects, for which
people must spend a lot of time and resources to get such information.
If a medium of
exchange existed, it would solve half the problem. However, Amit still must
determine the value of the table in terms of medium of exchange. Thus, if a
medium of exchange exists, with well-known characteristics, it will reduce the
information cost of trade. Without a medium of exchange information, the cost
would be enormous indeed.
(v)
Production of large and very expensive goods is not possible: Another
problem of barter economy is related to the production of large, expensive
goods. Suppose a person who has the technical skills and equipment to build a
car would not have much incentive to build it in a barter economy.
This is
because he can exchange the car with someone who has enough goods of equal
value to exchange them for the car. The car maker should get food, clothes, and
many other items of daily consumption in exchange for the car. It would be very
difficult, almost impossible, to find a potential buyer who has a sufficient
stock of these goods and services to exchange for the car.
It is clear
from the above that the barter system could have worked in a primitive economy
where life was simple and man was self-sufficient. As humans made some economic
progress, division of labor or specialization, and mass production came into
existence, the barter system could not meet the growing need to exchange goods.
There would be
no mass production in a barter economy because of the difficulties of exchange,
no advantage in the use of capital-intensive specialized machinery, and no easy
and cheap means in which to deposit money.
The range of
goods produced should be much less than that produced in modern developed
economies. Money was invented to meet the needs of a common unit of account as
well as a generally accepted medium of exchange and thus to overcome the
difficulties faced under the barter system.
22. Discuss the various essential conditions for
successful Open Market Operation. 8
Ans:- Open Market Operations is a tool used by the
RBI during the year to smoothen the liquidity conditions and regulate the money
supply in the economy.
(a) The central
bank should have a large quantity and variety of securities so that it can buy
them and sell them as and when required. The wide maturity range also helps the
central bank to reach many potential buyers and sellers.
(b) The success
of OMOs also depends on the level of development of financial markets and their
responsiveness to changes in demand and supply of individual instruments.
(c) Depending on
the way in which OMO is used, it is expected to be effective in both expansion
and contraction of the economy.
(d) There may be
circumstances in which banks may be able to offset variations in their cash
balances partly by adjusting the composition of their balance assets.
(e) There is no
fixed or constant quantitative relationship between OMOs and the quantity of
money and their effect on credit and rate of interest. The cash deposit ratio
maintained by banks varies with and other circumstances.
***
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