IGNOU| MONEY, BANKING AND FINANCIAL INSTITUTIONS (ECO - 09)| SOLVED PAPER – (DEC - 2022)| (BDP)| ENGLISH MEDIUM
BACHELOR'S DEGREE PROGRAMME
(BDP)
Term-End Examination
December - 2022
(Elective Course: Commerce)
ECO-09
MONEY, BANKING AND FINANCIAL
INSTITUTIONS
Time: 2 Hours
Maximum Marks: 50
Note: The paper contains three Sections A, B and C.
Necessary instructions are given in each Section.
Section-A
Note: Attempt any two questions from this Section.
1. Discuss Keynes' theory of money and prices. 12
Ans:- John Maynard Keynes' theory of money and prices
states that there is an indirect and non-proportional relationship between the
quantity of money and prices. This differs from the traditional quantity theory
of money, which states that there is a direct and proportional relationship
between the quantity of money and prices.
Keynes' theory
states that:-
(i) Money does
not directly affect the price level
(ii) A change in
the quantity of money can cause a change in the interest rate.
(iii) The
quantity of investment may change due to change in interest rate.
(iv) Price level
is determined by aggregate demand and supply
(v) Money supply
cannot be transferred directly or equally to effective demand
Keynes also
developed the theory of liquidity preferences, which states that the
equilibrium "price" of money is the interest rate where the supply of
money intersects the demand for money.
During the global
financial crisis of 2007–08, many governments, including the United States and
the United Kingdom, used Keynesian ideas as the theoretical basis for their
economic policies. For example, Keynes advocated a government response to a
global recession that would involve the government increasing its spending and
reducing its taxes to stimulate demand.
Keynes does not
agree with older quantity theorists that there is a direct and proportional
relationship between the quantity of money and prices. According to him, the effect
of change in the quantity of money on prices is indirect and non-proportional.
Keynes complains
that "Economics is divided into two parts between the theory of value and
the theory of money and prices which have no doors or windows." This
dichotomy between the relative price level (as determined by the demand and
supply of goods) and the absolute price level (as determined by the demand and
supply of money) was used by classical monetary economists to integrate price
theory with monetary theory. To integrate. arises from failure in. As a result,
changes in the money supply affect only the absolute price level but have no
effect on the relative price level.
Furthermore,
Keynes criticizes the classical theory of static equilibrium in which money is
assumed to be neutral and does not affect the actual equilibrium of the economy
related to relative prices.
According to him,
real-world problems are related to the theory of changing equilibrium while
money enters as "the link between the present and the future".
2. Explain the primary and secondary functions of
commercial banks. Discuss the economic significance of banks. 8+4
Ans:- Commercial banks have the following functions:
Accepting deposits, issuing loans, advances, cash, credit, overdrafts and bill
discounting are all primary functions. Secondary functions include issuing
debentures, safeguarding valuables, providing consumer financing and
educational loans.
Functions of
Commercial Bank:-
The
operations of commercial banks are classified into two main divisions.
(A) Primary
functions:-
(i) Accepts
deposits: The bank takes deposits in the form of savings, current and fixed
deposits. The surplus balance collected from firms and individuals is lent for
the temporary needs of commercial transactions.
(ii)
Provides loans and advances: Another important function of this bank is to
provide loans and advances to entrepreneurs and businessmen and collect
interest. It is the primary source of profit for every bank. In this process, a
bank keeps a small number of deposits in reserve and offers (lends) the
remaining amount to borrowers in demand loans, overdrafts, cash loans, short-term
loans and other such banks.
(iii)
Credit cash: When credit or loan is provided to a customer, he is not
provided with liquid cash. First, a bank account is opened for the customer and
then money is transferred to the account. This process allows the bank to make
money.
(B) Secondary functions:-
(i)
Discount on Bills of Exchange: It is a written agreement in which a sum of
money is accepted to be paid in exchange for goods purchased at a specified
time in the future. The amount can also be paid before the quoted time through
the discounting method of a commercial bank.
(ii)
Overdraft facility: It is an advance given to the customer to overdraft the
current account up to a certain limit.
(iii)
Buying and selling of securities: The bank provides you the facility to buy
and sell securities.
(iv) Locker
facilities: A bank provides locker facilities to the customers to keep
their valuables or documents safe. Banks charge a minimum annual fee for this
service.
(v)
Repaying and collecting debts: It uses various instruments like promissory
notes, checks and bills of exchange.
The economic significance
of banks can be understood as follows:-
(i) Banks help
in running the economy.
(ii) Banks
collect people's savings and convert them into capital for businesses and
companies.
(iii) Banks pave
the way for economic development by giving loans to the needy.
(iv) Banks
provide money to people to buy cars and houses and to businesses to buy
equipment, expand their operations and meet their payroll.
(v) Banks
concentrate the dispersed and idle assets of the country and utilize them for
production purposes in the country, thereby promoting capital formation and
helping in the progress of production.
(vi) Banks, as
the most important part of the money market, are important instruments for the
economic development of the country.
(vii) Banks
provide financial security and confidence.
Banks deal in
money and loans. Bank is an institution where money is deposited, preserved and
issued. Banks provide loan and deduction facilities. Banks make arrangements to
send money from one place to another.
3. What are the functions of Reserve Bank of India? Explain
the role of its promotional functions in the economy. 8+4
[COMING SOON]
***
MONEY, BANKING AND FINANCIAL INSTITUTIONS SOLVED PAPERS PAGE LINK - Click here
IGNOU PAGE LINK - CLICK HERE
Also Read: