Money And Banking - Class 12 Commerce Economics - Extra Questions

When commercial banks fail to meet their financial requirements from other sources, they can approach the central bank for loans and advances as the lender of the last resort.

Repo rate is the rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds.

The central Bank acts as a banker and financial advisor to the government. As a banker to the government, it performs the following functions.

Cash reserve ratio refers to the minimum percentage of time and demand deposits, required to be kept by every commercial bank with the central bank. 

(i) Bank rate will be increased. (ii) Margin requirements will also be increased. (iii) Central bank will start selling the securities in the open market.

A bank rate is the interest rate at which a nation's central bank lends money to domestic banks, often in the form of very short-term loans. Bank rate is a rate at which the central bank discounts first-class bills or advance loans against approved securities to commercial banks. When the central bank raises the bank rate, the cost of borrowing of the commercial banks will increase, so that they will also charge a higher rate for loans and advances made to their customers and, thus, the market rate of interest will go up. Increased market rate or increase in the cost of borrowing will discourage credit creation, and their demand for credit falls. 

On the other hand, When the bank rate is lowered, the cost of borrowing of the commercial banks will decrease, so that they will also charge a lower  rate for loans and advances made to their customers and, thus, the market rate of interest will go down. Decreased market rate or decrease in the cost of borrowing will encourage business activity, and their demand for credit rises.

Rationing of credit is a method by which the Central Bank seeks to limit the maximum amount of loans and advances and, also in certain cases, fix ceiling for specific categories of loans and advances. Under this method, the Central Bank fixes a maximum limit for loans that a commercial bank can provide to a particular sector or for all purposes. This method restricts the flow of credit in undesirable sectors & diverts it into the most desirable sector. For example: The central bank has raise the maximum ceiling on agriculture sector to promote the flow of credit in Rural sector, this is done to encourage the activity in agriculture sector.

The cash reserve ratio refers to that proportion of the aggregate deposits which the commercial banks are required to keep with the Reserve Bank of India in the form of cash. The Central Bank has the power to vary the CRR.  Currently CRR in India is 4%.

The Central Bank has the power to vary the percentage of deposits that must statutorily be kept with it by commercial banks, within certain limits.

When the Central Bank wants to reduce credit, it will increase the cash ratio to be kept by the commercial banks. This reduces the capacity of the commercial banks to lend and thus, the credit creation is controlled.

When the Central Bank considers increasing the credit, it will lower the cash reserve ratio. Now the commercial banks will have additional cash which will lead to credit expansion. So, the cash reserves with commercial banks change according to CRR set by the RBI.

Eight major functions of central bank in an economy are as follows:

(1) Bank of Issue,

 (2) Banker, Agent and Advisor to Government,

 (3) Custodian of Cash Reserves,

(4) Custodian of Foreign Balances,

(5) Lender of Last Resort,

(6) Clearing House,

(7) Controller of Credit, and

(8) Protection of Depositor’s Interest.

 

Open market operation refers to buying and selling of eligible securities by the Central Bank in the money market and capital market. This is a tool to control inflationary & deflationary situation in the market. The buying and selling of securities by the Central Bank result in an increase or decrease in the cash resources of the commercial banks. This in turn affects the credit creation of the commercial banks.

 For example:  In times of inflation, the Central Bank reduces the volume of credit created by the banks, it sells eligible securities in the market. This results in the movement of cash from Commercial Banks to Central Bank. As a result of this the primary reserves of the banks fall. Hence, the capacity of the banks to create credit will be contracted. Similarly, in times of deflation, the Central Bank purchases the eligible securities from the open market, this results in the movement of cash from the Central Bank to commercial banks. As a result, the cash re­serves in the hands of commercial banks will increase. Hence, the capacity of the banks to expand credit will be expanded.

 

Moral suasion is a qualitative method of credit control, being used by the central bank. Under this method, the Central Bank merely uses its moral influence on the commercial banks. It includes the advice, suggestion request and persuasion with the commercial banks to co-operate with the Central Bank. If the commercial banks do not follow the advice extended by the Central Bank, no penal action is taken against them. The success of this method depends upon the cooperation between the Central Bank and Com­mercial Banks and the respect the Central Bank commands from other banks.

Margin requirement refers to the difference between the current value of the security offered for a loan (called collateral) and the value of the loan granted. For example:- a person mortgages his house worth one crore rupees with the bank for a loan of 80 lakh rupees. The margin requirement in this case will be 20 lakh rupees.

It is a qualitative method of credit control adopted by the central bank in order to stabilize the economy from inflation or deflation. During inflation, the margin requirement is increased which reduces the credit demand in the market, and thus money supply is reduced correcting inflation whereas, during deflation, the margin requirement is decreased which increases the credit demand in the market, and thus money supply is increased correcting deflation. 

Statutory Liquidity Ratio (SLR) refers to liquid assets that the commercial banks must hold on a daily basis as a percentage of their total deposits. SLR is determined by the central bank and is a legal requirement to be fulfilled by the commercial banks whereas Cash Reserves Ratio (CRR) refers to the proportion  of total deposits of the commercial banks which they must have keep as cash reserves with the central bank. The ratio is fixed by the central bank and is varied from time to time to control the supply of money in the economy depending upon the prevailing situation of inflation or deflation.

The Central bank  serves as a banker to the Central Government and the State Governments. It is its obligatory function. It performs the following functions:-

1)  As a bank for the government:- As a banker, the central bank performs banking functions for the government as commercial banks perform for the public by accepting the government deposits and granting loans to the government. Central bank also performs the function of making receipts and collection of payments to the Central and State Governments & making payments on behalf of the Central and State Governments.

2) As an agent of the government:- As an agent, the central bank manages the public debt, undertakes the payment of interest on this debt, and provides all other services related to the debt.

3) An advisor to the government:- As an advisor, the central bank gives advice to the government regarding economic policy matters, money market, capital market, and government loans. Apart from this, the central bank formulates and implements fiscal and monetary policies to regulate the supply of money in the market and control inflation.

The qualitative or the selective methods are directed towards the diversion of credit into particular uses or channels in the economy. Their objective is mainly to control and regulate the flow of credit into particular industries or businesses.

The following are the important methods of credit control under selective method:

1. Rationing of Credit.

2. Direct Action.

3. Moral Persuasion.

4. Method of Publicity.

5. Regulation of Consumer’s Credit.

6. Regulating the Marginal Requirements on Security Loans.

 

The methods of credit control adopted by the 'Central Bank' are: 

The bank rate is the rate at which the commercial bank gets a rediscount on loans and advances by the central bank. The increase in the bank rate results in the rise of rate of interest on loans for the public. This leads to the reduction in total spending of individuals.

CRR [Cash Reserve Ratio]: According to RBI act, each commercial bank has to keep a certain ratio of cash reserves (deposits) with the central bank or RBI. The RBI is empowered to vary this CRR between $$3$$% to $$15$$%.
By increasing the CRR, the excess reserve of commercial bank is reduced, which restricts the credit granting capacity of the commercial banks. Similarly, the reduction in CRR, increases the capacity of commercial banks to expand credits.

Functions of the central bank as a 'Banker of Banks' and 'Banker to the Government' :-

Bank rate is the rate at which central bank rediscounts the first class bills of exchange of commercial banks. Simply speaking it is the rate of interest at which central bank lends money to the commercial banks. It is used as an instrument of the credit control policy of the central bank.

Cash reserve ratio (CRR) is a specified minimum fraction of the total deposits of customers with the bank, which the commercial banks have to hold as reserves in cash or as deposits with  the Central Bank. CRR is set according to the guidelines of the Central Bank of a country.

Reserve Bank of India (RBI) is called Bankers' Bank. A bankers's bank provides financial services to other banks.

Money acts as medium of exchange as it facilitates exchange through a common medium i.e. currency. With money as a medium, the two components of a transaction namely, sale and purchase can be easily separated. In other words, money eliminates the need for double coincidence of wants for an exchange to take place and can be performed independently of each other. Moreover, money has widened the domain and scope of market. Today, market is no more limited to a specific geographical location. This can be verified by the increasing popularity of online transactions. Hence, it can be concluded that money has infused commercialisation, which has raised the overall level of economic activities and has made production market oriented.

Money refers to a common medium of exchange that is issued under the law of government and acts as a legal tender for the whole country. The functions of money can be classified into two categories: 

1. Cash Reserves Ratio (CRR) refers to the proportion  of total deposits of the commercial banks which they must have keep as cash reserves with the central bank whereas Statutory Liquidity Ratio (SLR) refers to liquid assets that the commercial banks must hold on daily basis as a percentage of their total deposits.  

 Central bank is an apex bank that controls the entire banking system of a country. It is the sole agency of note issuing and controls the supply of money in the economy. It serves as the banker of the government and manages foreign exchange of the government. The various functions performed by central bank are :-

Central bank is an apex bank that controls the entire banking system of a country and controls the supply of money in the economy through its various monetary policies. The central bank also lends money to commercial banks. When the commercial banks are facing liquidity crunch or any type of insolvency, the central bank are the last resort to provide loans against treasury bills, government securities, and bills of exchange. Even at the time of insolvency or any type of debt, the government approaches central bank for the loan. Therefore, central bank acts as a lender of last resort. 

 

The monetary policy of Central Bank regulates the money supply to realise Economic goals. 

The currency notes issued by Central Bank are unlimited legal tender.

Central bank is an apex bank that controls the entire banking system of a country and controls the supply of money in the economy through its various monetary policies. The Central bank is a banker, agent and financial adviser to the government. It manages the account of the government by transacting government funds, it buys and sells the securities of the government and maintains foreign reserves for the government. 

Central Bank is the Controller of bank credit.

Cash Reserves Ratio (CRR) refers to the proportion  of total deposits of the commercial banks which they must have keep as cash reserves with the central bank in the form of cash. Cash reserve ratio is determined by central bank so that they can use it as a quantitative instrument to control the amount of credit creation of the commercial banks at the time of inflation or deflation in the economy. 

Central bank lends money to all the commercial banks and the government when they are facing liquidity crunch or any type of insolvency. The central bank are the last resort to provide loans to the banks and the government against any type of collateral like treasury bills, securities or any type of promissory notes. 

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b'Statutory Liquidity Ratio (SLR) refers to unencumbered assets which includes gold, cash etc. that the commercial banks must legally hold on daily basis with themselves as a percentage of their total deposits. Statutory liquidity ratio is determined by the central bank so that it can be used as a monetary instrument to control the creation of credit in order to stabilize the situation of inflation or deflation in the economy. '

b'Central bank is an apex bank that controls the entire banking system of a country. Central bank has monopoly rights of issuing notes. This is called currency authority function of central banks. All notes issued by central bank acts as an unlimited legal tender in the country. Therefore, central bank is also known as bank of note issue. '

A clearing house system is a system that facilitates exchange or clearance of payments, securities, or derivatives transaction between two clearing firms who are also known as member firms in order to reduce the risk of a member firm failing to honor its trade settlement obligations. 

Central bank lends money to government when they are facing liquidity crunch or any type of insolvency. The central bank are the last resort to provide loans to the government against any type of collateral. Therefore, they are known as the lender of the last resort for all other commercial banks and the government.

Cash Reserves Ratio (CRR) refers to the proportion of total deposits of the commercial banks which they must have keep as cash reserves with the central bank in the form of cash. Cash reserve ratio affects the lending capacity of the banks.
If the cash reserve ratio is high, then the bank will have to maintain more amount of cash with the central bank which will reduce their lending capacity and if the cash reserve ratio is low, then the bank will have to maintain less amount of cash with the central bank which will increase their lending capacity.

Central bank is a regulatory body that controls the entire banking system of a country. The central bank collects statistical data and economic information through its research department in order to publish them as a monthly bulletin with statistical supplements. It compiles data on the working of the commercial and cooperative banks, on the balance of payments, Government finances, security markets, price trends, and credit measures, data regarding agricultural, industrial, and financial sectors, exports and imports, money and capital markets, etc. with the banks ‘monetary policy and measures adopted. 

Qualitative Methods of credit control refers to the monetary policy by the central bank which includes those instruments that focus on the selected sectors of the economy to control and regulate the money supply. It includes: 

A. Margin Requirement:

Margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. It is a qualitative method of credit control adopted by the central bank in order to stabilize the economy from inflation or deflation.

B. Rationing of Credit:

Rationing of credit refers to fixation of credit quotas for different business activities which is introduced when the flow of credit is to be checked particularly for speculative activities in the economy. 

C. Moral Suasion: 

Moral suasion refers to the persuasion and pressure which central bank exert on the member banks in order to follow its directives. These are generally not ignored by the member banks as it comes directly from the upper authority. The banks are advised to restrict the flow of credit during inflation and be liberal in lending during deflation. 

The central bank is an apex bank that controls and regulates the entire banking system of a country. It is the bank of the bankers and has the power to take any direct actions and punishments against illicit activities performed by any defaulting commercial banks.

The central bank is an apex bank that acts as a banker to the government as on the behalf of the government it transfers government funds to the related parties, it even maintains the foreign reserve of the government and lends money to the government that the time of any liquidity crunch. 

Cash Reserves Ratio (CRR) refers to the proportion  of total deposits of the commercial banks which they must have kept as cash reserves with the central bank in the form of cash.
The cash reserve ratio is determined by the central bank so that it can be used as a quantitative instrument to control the amount of credit creation by the commercial banks at the time of inflation or deflation in the economy. 
During inflation, the cash reserve ratio is increased to reduce the total money supply in the economy by reducing the amount of credit creation by the commercial banks and during deflation, the cash reserve ratio is decreased to increase the total money supply in the economy by increasing the amount of credit creation by the commercial banks

The difference between Cash Reserve Ratio(CRR) and Statutory Liquidity Ratio(SLR) are as follow:

1. Cash Reserves Ratio (CRR) refers to the proportion  of total deposits of the commercial banks which they must have keep as cash reserves with the central bank whereas Statutory Liquidity Ratio (SLR) refers to liquid assets that the commercial banks must hold on daily basis as a percentage of their total deposits.  

2. In cash reserve ratio only cash is maintained with the central bank whereas in statutory liquidity ratio both cash and other types of assets like gold and securities can be maintained. 

3. Cash reserve ratio regulates the flow of money in the economy whereas statutory liquidity ratio ensures solvency of banks in the economy. 

4. Cash reserve ratio is usually lower than statutory liquidity ratio so that solvency of commercial banks can be maintained. 

The central bank is an apex bank that controls the entire banking system of a country. The central bank is Banker's bank as it acts as a friend, philosopher, and guide to all the commercial banks by helping the commercial banks to practice the banking services more efficiently, guide them at the time of any uncertainty, and list the rules and regulations according to which they have to work. They also accept deposits and grant loans to all commercial banks. 

Consumer credit refers to a personal debt taken by a consumer on the purchase of goods and services for the satisfaction of wants. Regulation of consumer credit act as a qualitative credit control measure of the central bank. At the time of inflation or deflation, they regulate the consumer credit on a certain relative products which are affected by inflation or deflation in the economy. 

Central bank is an apex bank that controls and regulates the entire banking system of a country. The various functions performed by the central bank are:- 

1. Bank of issuing notes: Central bank has monopoly rights of issuing notes. This is called the currency authority function of central banks. All notes issued by the central bank are unlimited legal tender in the country.

2. Banker to the Government: Central bank is a banker, agent, and financial adviser to the government. It manages the account of the government, it buys and sells the securities of the government and it frames policies to regulate the money market.

3. Custodian of foreign currency: The central bank maintains a minimum reserve of international currency all the time in order to meet emergency requirements of foreign exchange and overcome adverse requirements of deficit in the balance of payments.

4. Lender of last resort: The central bank also lends money to commercial banks. When the commercial banks are facing a liquidity crunch or any type of insolvency, the central bank is the last resort to provide loans against treasury bills, government securities, and bills of exchange.

5. Maintains cash reserves of commercial banks: The central bank takes care of the cash reserves of commercial banks. Commercial banks are required to keep a certain amount of public deposits as cash reserve, with the central bank.

6. Control of credit: The central bank has power to regulate credit creation by commercial banks. The credit creation depends upon the amount of deposits, cash reserves, and rate of interest given by commercial banks. All these are directly or indirectly controlled by the central bank. Therefore, they have the power to control the amount of credit creation of commercial banks. 

Yes, I do agree with this statement. 

No, I do not agree with this statement. 

No, I do not agree with this statement.

Commercial banks must deposit a certain percentage of their deposits with the central bank. Central banks utilise their funds to settle the claims of one bank by the other. In other words, the central banks undertake the transfer of funds from one bank to the other to settle inter-bank claims. In addition to this, the central bank also buys and sells securities on behalf of the government. By buying securities, transfers money from the government account to the account of the security holder, similarly, when it sells securities it transfers money into the government account. Thus, in these ways, the central bank (RBI) transfers money from one place to another.

Yes, I do agree with this statement.

Yes, I do agree with this statement. 

No, I do not agree with this statement. 

Yes, I do agree with this statement. 

No, I do not agree with this statement. 

There are four major types bank deposits which are as follows:

Repo rate is the rate charged on the secured loans offered by the Central bank to the commercial banks that includes collateral. It is increased at the time of inflation to reduce the credit creation by the commercial banks which reduces the money supply in the economy and it is decreased at the time of deflation to increase the credit creation by the commercial banks which increases the money supply in the economy. 

Reverse repo rate is the rate at which the commercial banks keep the reserves with the central bank. This rate is determined by the central bank and the central bank pays it to the commercial banks in percentage of the reserves kept with them.  It is decreased at the time of inflation to reduce the credit creation by the commercial banks which reduces the money supply in the economy and it is increased at the time of deflation to increase the credit creation by the commercial banks which increases the money supply in the economy. 

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Multiplier is the ratio between increase in income and increase in investment. It explains how many times is income increased by increasing the investment.

Opportunity cost of production of a commodity refers to the cost which the producer has to sacrifice in terms of the next best alternative which could be produced out of that cost in order to produce every unit of the given commodity. Therefore, the cost of keeping Rs. 1000 as cash in  hand will mean a sacrifice of Rs. 100 which we would have got on depositing the money into bank. 

Central bank is also known as banker to the government as central bank is an banker, agent and financial adviser to the government. It manages the account of the government, it buys and sells the securities of the government and it frames policies to regulate the money market.

Central bank is an apex bank that controls the entire banking system of a country. It is the sole agency of note issuing and controls the supply of money in the economy. It serves as the banker of the government and manages foreign exchange of the government. 

Central bank has monopoly rights of issuing notes. This is called currency authority function of central banks. All notes issued by central bank are an unlimited legal tender in the country. 

Central bank is an apex bank that controls the entire banking system of a country. It is the sole agency of note issuing and controls the supply of money in the economy. It serves as the banker of the government and manages foreign exchange of the government.it is known as banker's bank. As it is a banker, agent and financial adviser to the bank. It manages the account of the other commercial banks, provide the banks with cash at the time of immediate cash crunch and it frames policies to regulate the money market.

Bank rates are the rates charged on the loans offered by the Central bank to the commercial banks without any collateral. The bank rate does not allow any facility of repurchase of securities. It relates to the borrowing by the commercial banks to cope with their immediate cash crunch.

Central bank is an apex bank that controls the entire banking system of a country. It is the sole agency of note issuing and controls the supply of money in the economy. It serves as the banker of the government and manages foreign exchange of the government. It is know as banker to the Government it is an banker, agent and financial adviser to the government. It manages the account of the government, it buys and sells the securities of the government and it frames policies to regulate the money market.

Reverse repo rate is the rate at which the commercial banks park reserves with the central bank. This rate is decided by the central bank and the central bank pays it to the commercial banks of the amount parked with them in form of deposits. 

Deposits have been defined under the Companies Act, 2013 ("2013 Act") to include any receipt of money by way of deposit or loan or in any other form by a company. However deposits do not include such categories of amounts as may be prescribed in consultation with the Reserve Bank of India ("RBI").

Money is generally defined as a thing that is commonly accepted as a medium of exchange. The various functions performed by money are 

Agree.

Money supply refers to the total stock of money of all types ( currency as well as demand deposits) held by the people of a country at a given point of time. 

Money supply is measured in several ways which includes M1, M2, M3 and M4  measurement of money supply. Every measurement has it own definition with different components varying from most liquid to most rigid form. 

1. M1= C+ DD+ OD 

where, 

C: It refers to currency held by public in terms of coins and paper notes.

DD: It refers demand deposits of the people with the commercial bank.

OD: These includes other deposits with public financial institution, foreign central banks and international financial institution. 

2. M2 =  M1+ deposits with the post office saving bank account 

3. M3 = M1 + net time deposits with the commercial banks 

4. M4 = M3 + Total deposits with post offices other than in the form of national saving certificate

(i) Barter Exchange: Barter system was a system of exchange where goods were exchanged for goods and there was no common medium of exchange in the economy. Barter system had many drawbacks like lack of double coincidence of wants, lack of a common unit of value, difficulty of future payments or contractual payments and difficulty of storage of value and transfer of value. 

1. Common medium of exchange 

2. Store of value

3. Common measure unit 

4. Serve as the standard of deferred payments 

(iii) Money supply : Money supply refers to the total stock of money of all types ( currency as well as demand deposits) held by the people of a country at a given point of time. 

Money supply is measured in several ways which includes M1, M2, M3 and M4  measurement of money supply. Every measurement has it own definition with different components varying from most liquid to most rigid form. 

Demand deposits are the deposits, which can be withdrawn without any prior notice.

The principal motive to hold money is to carry out transactions. People earn incomes at discrete points in time and spend it continuously throughout the interval. Transaction demand for money of economy is a fraction of the total volume of transactions over a unit period of time.

Legal tender money refers to money which can be legally used to make payment of debts or other obligations.
Fiat money is defined as the money which is under the fiat or order from the government to act as money, i.e., under law, it must be accepted for all debts. 

Money supply is a stock variable because it is expressed at a particular point of time.

(i) Currency and coins with public; 
(ii) Demand deposits of commercial banks. 

Money supply refers to the total stock of money of all types ( currency as well as demand deposits) held by the people of a country at a given point of time. 

Money supply is measured in several ways which includes M1, M2, M3 and M4  measurement of money supply. Every measurement has it own definition with different components varying from most liquid to most rigid form. 

1. M1= C+ DD+ OD 

where, 

C: It refers to currency held by public in terms of coins and paper notes.

DD: It refers demand deposits of the people with the commercial bank.

OD: These includes other deposits with public financial institution, foreign central banks and international financial institution. 

2. M2 =  M1+ deposits with the post office saving bank account 

3. M3 = M1 + net time deposits with the commercial banks 

4. M4 = M3 + Total deposits with post offices other than in the form of national saving certificate

A rise in the bank rate means that the interest charge from commercial banks will increase and it would force commercial banks to increase their interest which will reduce the borrowing by general public and interest rate is high, so the money supply would decrease.

Open market operations refers to buying and selling of securities in an open market, in order to affect the money supply in the economy. The selling of securities by Reserve Bank of India will wipe out extra cash balance from the economy, thereby limiting the money supply resulting in controlled credit creation. To summarize,

$$THE\space\space TOTAL \space \space AMOUNT\space\space OF\space\space CASH\space\space IN\space\space THE\space\space COUNTRY$$

The central bank is given the sole monopoly of issuing currency in order to secure control over volume of currency and credit. These notes circulate throughout the country as legal tender money. It has to keep a reserve in the form of gold and foreign securities as per statutory rules against the notes issued by it.

It may be noted that RBI issues all currency notes in India except one rupee note. Again, it is under the directions of RBI that one rupee notes and small coins are issued by government mints. Remember, the central government of a country is usually authorised to borrow money from the central bank.

When the central government expenditure exceeds government revenue and the government is unable to reduce its expenditure, then it borrows from the RBI. This is done by selling security bills to RBI which creates new currency notes for the purpose. This is called monetisation of budget deficit or deficit financing. The government spends new currency and puts it into circulation to meet its expenditure.

The central bank is the bank of issue. It has a monopoly of note issue. Notes issued by it circulate as legal tender money. It has its issue department which issues notes and coins to commercial banks.
Coins are manufactured in the Government mint but they are put into circulation through the central bank.
However, the currency issued by the central bank is its monetary liability. In other words, the central bank is obliged to back the currency issued by its asset of equal value such as gold, coins, and bullions.
In addition to issuing currency to the general public, the central bank also issues currency to the central Government of the country. 

The Central Bank acts as a banker to both Central and State Governments. It carries out banking business of the government and the government keeps its cash balances on current account with the Central Bank. It issues loans and advances to the government and does buying and selling of securities on behalf of government. It also advises the government to frame monetary policy of the country to control the credit creation and money market.

The central bank is the agency through which the state enforces its economic policy. To carry out this objective, central bank is entrusted with a number of functions. They are as follows:

1. $$Monopoly\space of\space Note\space Issue$$:

The central bank enjoys the monopoly of note issue in order to secure control over currency. No other bank is allowed to issue notes. Notes are the most effective credit instrument and declared by law as legal tender money.

The central bank issues notes according to the requirements of business and the general public. As a result of the exclusive monopoly of note issue, central bank can exercise a considerable measure of control over the currency and credit structure of the country.

2. $$It\space is\space the\space banker’s\space bank$$:

The central bank acts as the banker’s bank. All other banks are required to have accounts with the central bank and to keep with it a certain percentage of their deposits. The central bank is the custodian of the banking reserves of the country.

Whenever necessary, it also lends money to other banks by rediscounting bills of exchange and against approved commercial papers. The central bank is the lender of the last resort because the money supply of the country is under its control.

3. $$Banker\space to\space the\space Government$$:

The central bank acts as the banker, agent and adviser of the government. Government balances are kept with it and it gives short-term loans to the government known as ways and means advances.The central bank also manages the public debt. The central bank operates everywhere as the government’s banker because of the intimate connection between public finance and monetary affairs.

4. $$The\space Lender\space of\space the\space Last\space Resort$$:

By rediscounting first class bills or by taking advances on approved short-term securities from the central bank, other banks can increase their cash resources at the shortest possible notice. This makes their position more liquid.

Whenever a panic develops into a run on banks, this facility of turning their assets into cash at a moment’s notice is of great advantage to them.It is therefore the ultimate source from which emergency credit is obtained by the market to meet the temporary needs for additional credit or demands for cash on the part of the panic-stricken people.

5. $$Controls\space the\space Volume\space of\space Credit$$:

The volume of credit money depends on the lending policy of the commercial banks. The central bank can influence the lending policy of commercial banks.

The central bank controls the volume of credit mainly in three ways—by changing the bank rate, by engaging in open market operations and by varying the reserve ratios of member banks.

6. $$Maintaining\space the\space External\space Value\space of\space the\space country’s\space Currency$$:

Countries under gold standard were to depend on the central bank for managing it. Under managed paper currencies, the central bank has the charge of foreign exchange reserve and exchange control operations.

7. $$Miscellaneous\space Functions$$:

Central bank also performs certain other functions. It employs an efficient staff to carry on research. I publish journals and reports relating to different aspects of monetary and economic policy. It acts as the clearing house for the settlement of cheques and drafts of commercial banks.

When a commercial bank faces financial crisis and fails to obtain funds from other sources, then the central bank plays the vital role of 'lender of last resort' and provides them with the financial assistance in the form of credit. This role of the the central bank saves the commercial bank from bankruptcy. Thus, the central bank plays the role of guarantor for the commercial banks and maintains a sound and healthy banking system in the economy.

Open market operations refer to sale and purchase of securities (mainly government securities) in the open market by the central bank.

Cash reserve ratio is the share of a bank's total deposit that is mandated by the Reserve Bank of India to be maintained with the latter in the form of liquid cash. Statutory liquidity ratio is defined as the share of bank's total deposit that it needs to maintain itself as liquid assets.

There are usually hundreds of banks in a country. There should be some agency to regulate and supervise their proper functioning. This duty is discharged by the central bank.

Central bank acts as banker’s bank in three capacities:

(i) It is the custodian of their cash reserves. Banks of the country are required to keep a certain percentage of their deposits with the central bank; and in this way the central bank is the ultimate holder of the cash reserves of commercial banks, 

(ii) Central bank is lender of last resort. Whenever banks are short of funds, they can take loans from the central bank and get their trade bills discounted. The central bank is a source of great strength to the banking system, 

(iii) It acts as a bank of central clearance, settlements and transfers. Its moral persuasion is usually very effective so far as commercial banks are concerned.

Bank rates are the rates charged on the loans offered by the Central bank to the commercial banks without any collateral. The bank rate does not allow any facility of repurchase of securities. It relates to the borrowing by the commercial banks to cope with their immediate cash crunch. In case of inflation, the bank rate is increased due to which the cash left with commercial banks decreases with its credit creation capacity and in case of deflation the bank rate is decreased due to which commercial banks are able to create more credit.

Varying reserve requirements refers to the various reserves which the commercial bank has to maintain with itself as well as with the central bank. These includes 

The rate at which Central Bank borrows money from the banks is termed as Reverse Repo Rate. The Central Bank uses this tool when it feels there is too much money floating in the banking system. In case of a rise in the Reverse Repo Rate, it becomes more profitable for the Commercial Banks to lend to Central Bank, since they will now get higher amount against the amount lent. This implies higher the amount lent, higher are the returns. Thus, the Commercial Banks aim to transfer greater amount of funds to the Central Bank. This, in turn implies that the Commercial Banks are left with less surplus funds that they can lend to the general public. Hence, the lending capacity of the Commercial Banks reduces. This would further imply lesser amount of credit and money flowing within the economy, hence, lesser money supply. This results in the reduction in the credit creation capacity of Commercial Banks. A rise in reverse repo rate is desirable by the Central Bank if it aims at contracting monetary policy. However, on the contrary if the Central Bank aims at expansionary monetary policy, then it at first instance reduces the Reverse Repo Rate, which in tum makes the lending unattractive and discourages the Commercial Banks to lend to the Central Bank. Thereby, a fall in the reverse repo rate restricts the flow of money and credit in an economy. 

Basis For Comparison	Cash reserve ratio	Statutory liquidity ratio
1. Meaning	CRR is the percentage of money  which the bank has to keep with the Central bank of India in form of cash.	The bank has to keep a certain percentage of their Net time and demand liabilities in the form of liquid assets as specified by Reserve Bank of India.
2. Form	Cash	Cash and other assets like gold and government securities
3. Effect	It controls excess money flow in the economy.	It helps in meeting out the unexpected demand of any depositor by selling the bonds.
4. Regulate	Liquidity in the economy	Credit growth in the economy.

In order to control excess demand, the central bank must increase CRR so the credit creation capacity of the commercial banks and the money supply in an economy get decreased. As a result aggregate demand will also fall.

Open market operation (OMO) is a monetary policy by the central bank in which the bank deals in the sale and purchase of securities in the open market to control the supply of money in the economy. By selling the securities, the central bank soaks liquidity from the economy as in case of inflation and by buying the securities, the central bank releases liquidity in the economy as in case of deflation. 

Functions of Central bank are :

(i) Currency Authority: Central banks have monopoly rights of issuing notes. This is called currency authority function of central banks. All notes issued by the central bank are an unlimited legal tender in a country. 

(ii) Banker to the Government: Central bank is a banker, agent and financial adviser to the government. It manages the account of the government, it buys and sells the securities of the government and it frames policies to regulate the money market.

(iii) banker's bank and supervisor - central bank is also known as banker's bank. As it is a banker, agent and financial adviser to the bank. It manages the account of the other commercial banks, provide the banks with cash at the time of immediate cash crunch and it frames policies to regulate the money market. 

This is the most crucial function played by any Central Bank in the modem times. Central Banks are supposed to regulate and control the volume, and direction of the credit by using: 
(i) Quantitative Techniques: These are those techniques which influence the quantum of credit in the economy like open market operations, bank rate policy, repo and reverse repo rate poky, etc. 
(ii) Qualitative Techniques or Selective Credit Control techniques are the ones which influence the direction of credit In the economy, like margin requirements and moral suasion.

Repo rate relates to the loans offered by the RBI to the commercial banks not without collateral. During inflation repo rate is increased. As a follow-up action, the commercial banks rise the market rate of interest. This reduces the demand for credit and thus inflation can be combated.

It is true that commercial Banks creates money through credit creation. The Central Bank issues credit on basis of primary deposits and create money many more times than the deposits. These banks lend money for productive work which increase production, productivity and ultimately National Income.
We know that RBI prints new, money, while on the other hand, commercial bank multiplies money supplied by the RBI through the process of credit creation. People deposit money in their respective bank accounts. As per the central bank guidelines, the commercial banks are required to maintain a portion of total deposits in form of cash reserve.
With the help of the past experiences, the commercial banks know that not all the depositor will turn-up for withdrawal at the same day. Consequently, the commercial banks lend the remaining portion (left after maintaining cash reserve of the total deposits to the general public in form of credit, loans and advances. It is the second portion of the total deposits that is responsible for the credit creation (credit money).
The process of creation of credit money begins as soon as the commercial banks start the lending process. The amount of the credit money increases as the bank lend loans to more number of people in the economy. The deposit of money by the people in the banks and the subsequent lending of loans by the commercial banks is a never-ending process. This lending process of the commercial banks increases the rate of investment and production in the economy, which in turn help in improving the national income in the economy.

Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income and corresponding change in consumption.

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

K= 1/ (1-MPC) 

Income	100	200	300
Consumption	80	160	250
MPC	-	0.80	0.90
Multiplier (K)	-	5	10

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

K= 1/ MPS

If the entire income is saved then MPS= 1. 

Multiplier (K) = 1/1 = 1 time 

Excess demand is the excess of aggregate demand over and above its level required to maintain full employment equilibrium in the economy. Excess demand in an economy causes inflation, that is, rise in general level of prices. Thus, central bank takes measures to reduce the credit creation capacity  of the commercial banks during inflation. In turn, the money supply in an economy gets reduced and the inflationary gap or excess demand gets combated. Therefore, I would advocate contraction of money supply during excess demand.

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

K= 1/ MPS 

K= 1/ 0.25 = 4 times. 

The following are the various monetary policy instruments that the central bank uses to combat excess demand:
(i) Bank rate policy: Bank rate is the rate charged by the Central bank on its loans that it advances to a commercial bank against the securities. When Central bank needs to expand the credit then Bank rate is decreased and when it is needed to contract the credit, bank rate is increased. It directly affects the loan giving ability of the central bank. It is the easiest way of credit control.
(ii) Open market operations: Open market operations refer to the buying and selling of government securities by the central bank from the public or banks. When government wants to contract credit, the central banks start selling securities to the commercial banks, and when they want to expand credit, the central bank starts buying the securities. Buying the securities results in more money with the banks and they have more capability to advance loans. Similarly, selling the securities to the bank leaves them with less cash reserves, by which they become less capable for advancing loans.
(iii) Change in (CRR) Cash Reserve Ratio: Under CRR, the banks are required to deposit with the central bank a percentage of their net demand and time liabilities in the form of liquidity or cash. Banks reduce the percentage of deposits if they want to expand the credit, and they raise the percentage if they want to contract the credit.
(iv) Change in (SLR) Statutory Liquidity Ratio: The SLR requires the banks to maintain a specified percentage of their net total demand and time liabilities in the form of designated liquid assets with itself.

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

K= 1/ (1-MPC)

If C= 120+ 0.9 Y, MPC= 0.9 

Multiplier(k)= 1/ (1-0.9)

                   = 1/ 0.1

                   = 10 times 

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

Multiplier(k) => Change in income / 900 = 1/ (1- MPC)

                     => Change in income / 900  = 1/0.4

                     => Change in income / 900  = 2.5

                     => change in income  = 2.5 (900)  = 2250 crores.

If planned savings is less than the planned investment, it denotes that AD is more than AS, then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output. More output means more income. Rise in output means rise in AS and rise in income means rise in AD. Both continue to rise till they reach to a level, where AD = AS. 

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

k= change in income / change in investment.

Here if aggregate demand increases from E to E' owing to change in investment, then Income Increases from Y to Y'. 

Open Market Operations refer to the buying and selling of securities either to the public or to the commercial banks in an open market. Open Market operations refer to the buying and selling of securities in an open market, in order to affect the money supply in the economy. The selling of securities by RBI will wipe out the extra cash balance from the economy, thereby limiting the money supply resulting in controlled credit creation.
To summarise,
Selling of securities in the open market$$\Rightarrow$$ Extra Cash Balance$$\downarrow \Rightarrow$$ Money supply $$\downarrow$$(Controlled Credit Creation) 

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

Multiplier(k) = change in income / change in investment

                         or 

Multiplier(k) = 1/ MPS 

                         or

Multiplier(k) = 1 (1- MPC) 

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

k= change in income / change in investment

Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income and corresponding change in consumption.

K= 1/ (1- MPC) = 1 / (1 - Change in consumption/ change in income) 

   = change in income/ change in income- change in consumption

   = change in income/ change in savings 

   = change in income/ change in investment 

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

The maximum value of the multiplier can be Infinity when there in infinite times of change in income or MPC=1.

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

 If MPS= 0.1 , then MPC =1- MPS = 1- 0.1  = 0.9. So,

Venture capital (VC) is a type of financing that is used to finance startup companies and small businesses that are believed to have long-term growth potential. It is a form of private equity that is provided by the well-off investors, investment banks, and other financial institutions.

The central bank acts as banker to both central and state government. As a banker to the government, the central bank performs same functions as performed by the commercial banks to their customers.

1. It receives deposits from the government and collects cheques and drafts deposited in the government account.
2. It provides cash to the government as resumed for payment of salaries and wages to their staff and other cash disbursements.
3.  It makes payments on behalf of the government.
4. It also advances short term loans to the government.
5. It supplies foreign exchange to the government for repaying external debt or making other payments.

Money supply refers to total volume of money held by public at a particular point of time in an economy. The total stock of money circulating in an economy is the money supply. The circulating money involves the currency, printed notes, money in the deposit accounts and in the form of other liquid assets.

Central bank is an apex bank that controls the entire banking system of a country. It serves as the fiscal agent of the government and manages foreign exchange of the government. It is a banker, agent and financial adviser to the government. It manages the account of the government, it buys and sells the securities of the government and it frames policies to regulate the money market for the government. 

The Central bank exercises control over the foreign reserves to meet the deficit in the balance of payments and to maintain the international liquidity. In India, the RBI is the custodian of the country's foreign exchange reserves. It buys and sells rupees as well as foreign currency in the foreign exchange market to maintain the stability exchange rate.

Monetary policy is the macroeconomic policy laid down by the central bank. It involves the management of the money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.

As a fiscal agent to the government, Central Bank advises the government in matters relating to the fiscal, monetary and banking policies such as deficit financing devaluation, trade policy, foreign exchange policy, reduction in public expenditure, increase in taxes, public borrowings, policy of surplus budget, etc.

Banker to the government -

The Central Bank carries out all banking business of government both state and central governments. Government keeps their cash balances in the current account with the central bank. Similarly, central bank accepts receipts and makes payment on behalf of these governments. It gives loans and advances. It also manages public debt of the country. Central bank accepts receipts and makes payment on behalf of the government.

Points of difference	Central Bank	Commercial Bank
Power	Power to regulate money supply. Therefore, known as regulator.	Power to facilitate the changes. Therefore, known as facilator.
Motive	Main motive is the welfare of the economy.	Main motive is profit maximization.
Authority	Authority to issue currency of all denominations including notes and coins.	Authority to issue only one unit coin and note.
Lender	Central banks lends to commercial banks and government.	Commercial banks only lends to the public.
Credit creation	They have the power to increase or decrease the amount of credit creation.	They have the power of credit creation.

Central bank is the apex bank of all the commercial banks and financial institutions in the country. It holds the same relationship with the commercial banks as commercial bank holds with its customer. The central bank accepts deposits from the commercial banks and holds it as reserves for them. The commercial banks are compulsorily required to hold a part of their deposits as reserves with the central bank in accordance with the cash reserve ratio (CRR). In addition to the CRR requirements, the commercial banks hold reserves with the central bank for clearing their settlements with other banks and to fulfil their requirements of inter-bank transfers.

Credit control refers to various central bank policies which includes both qualitative as well as quantitative measures that regulates various factors that influence domestic currency directly or indirectly like money supply, interest rates and credit availability in the economy. The quantitative measures include two rate and two ratio policies as well as open market operation whereas qualitative measures include margin requirement, rationing of credit and Moral suasion.