NCERT Solutions for Class 12 Economics II Chapter 3 Money And Banking

Ans : Barter System Barter system refers to the exchange of goods for goods. e.g., If a person exchange wheat with rice. It is a barter system. Drawbacks of Barter system are as follows 
1. Difficulty of Double Coincidence of Wants It is not necessary that goods in possession of two different individuals are needed by each other. 
2. Lack of a Common Unit of Value It implies that the goods which are exchanged not measured in a common unit. 
3. Lack of a System for Future Payments Evolution is difficult thus future payments would not be possible. 

Ans : The functions of money can be divided in two categories-
1. Primary or (Main functions) 
2. Secondary functions 


I. The primary functions are of two types 
1. Medium of Exchange It can be used to make payment for all transactions of goods and services. 
2. Measure of Value It means that the value of each goods and services are measured in the monetary unit. 


II. Secondary functions are of three types 
1. Deferred Payments Money is used to make the future payments. 
2. Store of Value It implies store of wealth. 
3. Transfer of Value Money is used as a convenient mode of transfer of value.
The money over comes from the shortcomings of the barter system in a following manner 
(a) Use of money removed the difficulty of double coincidence of wants in the barter system. 
(b) Money facilitates storage of value. 
(c) Use of money removed the difficulty of division of commodity. 
(d) It removed the difficulty of medium of exchange. 
(e) Use of money removed the difficulty of deferred payments. 

Ans : The transaction motive relates to the demand for money to meet day-to-day transactions.
According to Keynes, "Transaction demand for money is positively associated with the level of income, as higher the level of Income, larger would be the size of money holdings for transactions. The relationship between the value of transactions and transaction demand is
\(\begin{aligned} M_{T}^{d} &=K T \\ \frac{1}{K} M_{T}^{d} &=T \\ V M_{T}^{d} &=T \\ V &=\frac{1}{K}, \text { represents velocity of circulation of money. } \end{aligned}\)
\(\begin{aligned} \text { Here, } T &=\text { Total value of transactions of money. } \\ K &=\text { Positive fractions } \\ M_{T}^{d} &=\text { Stock of money hold by people } \end{aligned}\) 

Ans : There are four alternative measures 01 money supply in India. 
These are known as MI, M2, M3 and M4 define as 
MI => Currency with public + Demand deposits + Other deposits with RBI 
M2 => MI + Saving with post office saving account 
M3 => MI + Net time deposits with banks 
M4 => M3 + Total deposits with post office (except NSC) 

Ans : Legal Tender Legal tender refers to the money which can be legally used to make payment of debts or other obligations. Fiat Money Fiat money refers to the money which is backed with order of the government under law. It must be accepted for all debts.