This article is helpful for those seeking important MCQs on National Income. Class 12 Economics Chapter 1 MCQs are easy to understand and of high quality based on the Economics PYQs. You can also get the detailed explanation video of this chapter on our YouTube Channel.

Money And Banking Important MCQ for CBSE Class 12 Economics

Instructions

• Each question carries 1 mark
• Choose the most appropriate option from the given choices
• Based on CBSE syllabus and previous year question patterns
• Answers are given at the end.

---

Questions

1. The system where trade is carried out through exchange of goods and services is called:
(a) Barter system
(b) Monetary system
(c) Credit system
(d) Banking system

2. The problem of ‘Double coincidence of wants’ is solved by:
(a) Goods
(b) Money
(c) Services
(d) Banks

3. Which of the following is NOT a function of money?
(a) Medium of exchange
(b) Store of value
(c) Unit of account
(d) Creation of wealth

4. Money supply is a:
(a) Stock variable
(b) Flow variable
(c) Constant variable
(d) None of these

5. M1 includes:
(a) Currency with public + Demand deposits
(b) Time deposits
(c) Savings with post office
(d) All deposits

6. Which is known as ‘Narrow Money’?
(a) M3
(b) M4
(c) M1
(d) M2

7. Which is known as ‘Broad Money’?
(a) M1
(b) M2
(c) M3
(d) All of these

8. High powered money is supplied by:
(a) Commercial banks
(b) RBI
(c) Government
(d) Both (b) and (c)

9. Legal tender money has:
(a) Commodity value
(b) Legal backing by government
(c) Market value
(d) Credit value

10. Demand deposits are:
(a) Fixed deposits
(b) Deposits withdrawable on demand
(c) Time deposits
(d) Savings deposits only

11. Commercial banks are:
(a) Profit-making institutions
(b) Non-profit institutions
(c) Government departments
(d) Welfare organizations

12. The primary function of commercial banks is:
(a) Credit creation
(b) Accepting deposits and lending
(c) Currency issue
(d) Monetary policy

13. Money multiplier is:
(a) 1/LRR
(b) LRR
(c) 1 + LRR
(d) LRR – 1

14. Credit creation depends on:
(a) Initial deposits
(b) Legal Reserve Ratio
(c) Money multiplier
(d) All of these

15. Legal Reserve Ratio consists of:
(a) CRR only
(b) SLR only
(c) CRR + SLR
(d) Bank Rate

16. Cash Reserve Ratio is maintained with:
(a) Commercial banks
(b) Government
(c) RBI
(d) Public

17. Statutory Liquidity Ratio is maintained in the form of:
(a) Cash only
(b) Government securities
(c) Cash and approved securities
(d) Foreign currency

18. The Central Bank of India is:
(a) State Bank of India
(b) Reserve Bank of India
(c) Bank of India
(d) Central Bank of India

19. RBI was established in:
(a) 1947
(b) 1935
(c) 1950
(d) 1969

20. Which is NOT a function of RBI?
(a) Currency issue
(b) Accepting public deposits
(c) Banker to government
(d) Credit control

21. Bank Rate is:
(a) Rate at which RBI lends to commercial banks
(b) Rate charged by commercial banks
(c) Deposit rate
(d) Exchange rate

22. Repo Rate is:
(a) Reverse of repo
(b) Rate at which RBI buys securities
(c) Rate at which RBI sells securities and buys them back
(d) Fixed deposit rate

23. Reverse Repo Rate is:
(a) Rate at which RBI borrows from banks
(b) Rate at which banks borrow from RBI
(c) Fixed rate
(d) None of these

24. Open Market Operations involve:
(a) Buying/selling of government securities
(b) Changing CRR
(c) Changing SLR
(d) All of these

25. Quantitative measures of credit control include:
(a) Bank Rate, CRR, SLR
(b) Moral suasion
(c) Margin requirements
(d) All of these

26. Qualitative measures of credit control include:
(a) CRR
(b) Moral suasion
(c) Bank Rate
(d) OMO

27. When RBI increases CRR:
(a) Money supply increases
(b) Money supply decreases
(c) No effect on money supply
(d) Money supply doubles

28. M2 equals:
(a) M1 + Time deposits
(b) M1 + Post office savings
(c) M3 + Post office deposits
(d) M1 only

29. M3 equals:
(a) M1 + Time deposits with banks
(b) M2 + Time deposits
(c) Currency + Deposits
(d) M4 – Post office deposits

30. M4 equals:
(a) M3 + All post office deposits
(b) M1 + M2
(c) Total money supply
(d) Currency in circulation

31. Credit money is:
(a) Physical currency
(b) Money created by banks through lending
(c) Government bonds
(d) Foreign currency

32. Fiat money is:
(a) Gold coins
(b) Money with commodity backing
(c) Money without commodity backing
(d) Credit cards

33. The money multiplier will be higher when:
(a) LRR is high
(b) LRR is low
(c) CRR is high
(d) SLR is high

34. Primary deposits are:
(a) Loans given by banks
(b) Initial cash deposits by public
(c) Government deposits
(d) Inter-bank deposits

35. Secondary deposits are:
(a) Fixed deposits
(b) Deposits created through lending
(c) Government deposits
(d) Foreign deposits

36. Lender of last resort means:
(a) RBI lends to public
(b) RBI lends to government
(c) RBI lends to banks in crisis
(d) Banks lend to RBI

37. Banker to the government means RBI:
(a) Collects taxes
(b) Manages government accounts and transactions
(c) Makes government policy
(d) Controls government spending

38. Controller of credit means RBI:
(a) Creates credit
(b) Destroys credit
(c) Regulates credit flow in economy
(d) None of these

39. If initial deposit is ₹1000 and LRR is 20%, total credit creation will be:
(a) ₹4000
(b) ₹5000
(c) ₹1000
(d) ₹2000

40. Custodian of foreign exchange reserves means RBI:
(a) Exchanges foreign currency
(b) Manages country’s foreign currency reserves
(c) Issues foreign currency
(d) Controls imports

---

Answer Key with Explanations

1. (a) Barter system
Explanation: Barter system involves direct exchange of goods without using money

2. (b) Money
Explanation: Money eliminates the need for mutual wants between parties in exchange

3. (d) Creation of wealth
Explanation: Money serves as medium of exchange, store of value, and unit of account but doesn’t create wealth

4. (a) Stock variable
Explanation: Money supply is measured at a point of time, making it a stock variable

5. (a) Currency with public + Demand deposits
Explanation: M1 = Currency with public + Net demand deposits with commercial banks + Other deposits with RBI

6. (c) M1
Explanation: M1 is called narrow money as it includes most liquid forms of money

7. (c) M3
Explanation: M3 is called broad money as it includes both liquid and time deposits

8. (d) Both (b) and (c)
Explanation: High powered money (reserve money) is supplied by RBI and Government

9. (b) Legal backing by government
Explanation: Legal tender money must be accepted by law for all transactions

10. (b) Deposits withdrawable on demand
Explanation: Demand deposits can be withdrawn anytime without notice

11. (a) Profit-making institutions
Explanation: Commercial banks operate to earn profits through banking services

12. (b) Accepting deposits and lending
Explanation: Primary functions are accepting deposits and providing loans

13. (a) 1/LRR
Explanation: Money multiplier = 1/Legal Reserve Ratio

14. (d) All of these
Explanation: Credit creation = Initial deposits × Money multiplier, where multiplier = 1/LRR

15. (c) CRR + SLR
Explanation: LRR = Cash Reserve Ratio + Statutory Liquidity Ratio

16. (c) RBI
Explanation: CRR is the percentage of deposits banks must keep with RBI

17. (c) Cash and approved securities
Explanation: SLR can be maintained as cash, gold, or government securities

18. (b) Reserve Bank of India
Explanation: RBI is the central bank of India established in 1935

19. (b) 1935
Explanation: Reserve Bank of India was established on April 1, 1935

20. (b) Accepting public deposits
Explanation: RBI doesn’t accept deposits from general public

21. (a) Rate at which RBI lends to commercial banks
Explanation: Bank rate is the discount rate at which RBI lends to commercial banks

22. (c) Rate at which RBI sells securities and buys them back
Explanation: Repo rate is for short-term liquidity with repurchase agreement

23. (a) Rate at which RBI borrows from banks
Explanation: Reverse repo is when RBI borrows money from commercial banks

24. (a) Buying/selling of government securities
Explanation: OMO involves RBI buying or selling government securities in open market

25. (a) Bank Rate, CRR, SLR
Explanation: Quantitative measures affect overall credit in the economy

26. (b) Moral suasion
Explanation: Qualitative measures like moral suasion affect specific sectors

27. (b) Money supply decreases
Explanation: Higher CRR reduces banks’ lending capacity, decreasing money supply

28. (b) M1 + Post office savings
Explanation: M2 = M1 + Savings deposits with post office savings banks

29. (a) M1 + Time deposits with banks
Explanation: M3 = M1 + Net time deposits with banking system

30. (a) M3 + All post office deposits
Explanation: M4 = M3 + Total deposits with post office savings banks

31. (b) Money created by banks through lending
Explanation: Credit money is created when banks lend more than they receive as deposits

32. (c) Money without commodity backing
Explanation: Fiat money has value because government declares it legal tender

33. (b) LRR is low
Explanation: Money multiplier = 1/LRR, so lower LRR means higher multiplier

34. (b) Initial cash deposits by public
Explanation: Primary deposits are original deposits made by customers

35. (b) Deposits created through lending
Explanation: Secondary deposits are created when banks lend money

36. (c) RBI lends to banks in crisis
Explanation: RBI provides funds to banks when they cannot get credit elsewhere

37. (b) Manages government accounts and transactions
Explanation: RBI acts as banker by managing government’s banking transactions

38. (c) Regulates credit flow in economy
Explanation: RBI controls the volume and direction of credit in the economy

39. (a) ₹4000
Explanation: Total deposits = 1000 × (1/0.2) = 5000. Credit created = 5000 – 1000 = 4000

40. (b) Manages country’s foreign currency reserves
Explanation: RBI maintains and manages India’s foreign exchange reserves

---

Key Formulas to Remember

Money Supply Measures:

• M1 = Currency with public + Net demand deposits + Other deposits with RBI
• M2 = M1 + Savings deposits with post office savings banks
• M3 = M1 + Net time deposits with banking system
• M4 = M3 + Total deposits with post office savings banks

Credit Creation:

• Money Multiplier = 1/LRR
• Total Deposits = Initial Deposit × Money Multiplier
• Credit Created = Total Deposits – Initial Deposit
• LRR = CRR + SLR

Important Functions

Functions of Money:

1. Primary Functions:

• Medium of exchange
• Measure of value

1. Secondary Functions:

• Store of value
• Standard of deferred payment

Functions of Commercial Banks:

1. Primary Functions:

• Accepting deposits
• Advancing loans

1. Secondary Functions:

• Agency services
• General utility services

Functions of Central Bank (RBI):

1. Traditional Functions:

• Bank of issue
• Banker to government
• Banker’s bank
• Lender of last resort

1. Developmental Functions:

• Controller of credit
• Custodian of foreign exchange reserves

Credit Control Methods

Quantitative Methods:

• Bank Rate Policy
• Open Market Operations (OMO)
• Cash Reserve Ratio (CRR)
• Statutory Liquidity Ratio (SLR)

Qualitative Methods:

• Margin Requirements
• Moral Suasion
• Direct Action

---

National Income Important MCQ | Class 12 Economics Chapter 1 MCQ