CBSE Class 12 Macro Economics Revision Notes Chapter 3

Class 12 Macroeconomics Chapter 3 Notes

The class 12 chapter 3 notes by Extramarks deals with one of the significant chapters of Macroeconomics: Money and Banking. Money And Banking is a chapter that concisely defines the monetary system. This chapter comprises of various concepts barter system, difficulties of a barter system, barter economy, functions of money, sub-functions of money, namely, primary function, a secondary function of money, fiat money, high powered money,  contingent functions, fiduciary money, money supplier, banking, commercial bank, functions of a commercial bank, central bank, tasks of central banks or RBI, cash reserve ratio or CRR, statutory reserve ratio or SLR.

The Class 12 Macroeconomics Chapter 3 Notes are considered useful study material while preparing for the class 12 economics board examinations. These notes available on Extramarks will give you insight into the barter system, functions of money and transaction demand of money. You can click on the Money and Banking notes links available on the Extramarks website, which you can follow to assist you in examination preparation. You can score well in the board exam and learn a chapter thoroughly by revising these notes. 

Key Topics Covered in Class 12 Macroeconomics Chapter 3 Notes 

Class 12 Macroeconomics Chapter 3 Notes you will learn the meaning and numerous roles that money plays. You will study in detail the

• The creation of money. 
• The functions of money. 
• Motives of holding money under the topic.
• Liquidity preference for money.
• An efficient knowledge about the transaction and speculative motives for holding money. 
• The legal definitions of narrow and broad money. 
• The Banking system 
• The working of Commercial Banks. 
• Type of deposits. 
• Different types of lending by Commercial Banks.
• knowledge about the instruments of monetary policy and the Reserve Bank of India 
• Learn about RBI  or the monetary authority of India.
• The instruments which RBI uses for conducting monetary policy. These include bank rate policy, regulating money through open market operations, varying reserve requirements, and others.

The key topics covered in Class 12 Macroeconomics Chapter 3 Notes are described briefly below.

Money

Money is always approved as a medium of exchange, a measure of value, a store of value and a means of payment. Money is the most regularly used means of exchange. It is an economic unit that presents as a universally acknowledged means of business in a transactional economy. Money proposes the benefit of reducing transaction costs. The role of money in an economy demands the exchange of commodities and more than an individual dealing with it. 

The demand for Money: It is known as an individual’s liquidity preference of holding money in liquid form that is cash beneficial to earn interest or as a precaution. Money demand is influenced by several factors such as inflation,  future uncertainty, and interest rates income. The transaction, and speculative motives, are two strong motives that affect the demand for money. 

Barter Exchange

Under this section of the Class 12 Macroeconomics Chapter 3 Notes, students will learn about the barter system. This is the oldest form of commerce. When one service or product is exchanged for another, a barter exchange takes place. Businesses and individuals exchange goods and services based on equivalent rates and fair estimates: similar pricing and quality assessments are considered by firms and individuals that deal with barter exchange. Bartering on wholesale can result in the most effective use of resources. When supply and demand are equal, Bartering can also aid economies in reaching equilibrium.

Disadvantages of Barter Exchange

• A lack of a traditional means of measuring value.
• A scarcity of standard value measures.
• There is a lack of need for duplication.
• Inability to divide.
• Deferred payment standards are lacking.
• Inadequate store of value.

Transaction Motive

Transaction motive is clearly defined in Class 12 Macroeconomics Chapter 3 Notes as the urge to hold cash amounts. Most of the transactions involve an exchange of money in the transaction motive for cash. It is fundamental to have money convenient for transactions as money is a primary unit of value. The aggregate quantity of transactions in a financial system tends to surge as income grows. Respectively income or GDP improves due to the demand for money in transactions.

Speculative Motive

It refers to funds reserved by investors to capitalise on future investment opportunities in the economy. The idea of retaining money is thought to be less dangerous than lending it or investing it in another asset; therefore, the speculative motive for demand for money emerges. Students may refer to various study materials apart from Class 12 Macroeconomics Chapter 3 Notes to know more.

Aggregate Money Demand: The complete demand for money is devised as transaction demand and speculative demand in an economy. The former is proportionate to actual GDP and the price level, whereas the latter is contrarily related to the market interest rate.

Fiat money: The government declares the currency as legal tender but is not favoured by a physical asset. The value of fiat money is not measured by the worth of the commodity used to make money but calculated by the link between supply and demand.

Supply of Money: It indicates the public’s total sum of money at a specific period in an economy. The supply of money does not include the cash balances held by the state and national governments and the stock of money held by the country’s banking system because these are not in movement. 

Banking Systems: A banking system is a class or network of institutions that give financial services to the public and private sectors. A banking system is fundamental to economic growth and evolution. It is vital in unlocking wealth, providing jobs, facilitating commerce and creating opportunities. It prepares a mechanism for individuals and businesses to partake in the global economy.

As mentioned in Class 12 Macroeconomics Chapter 3 Notes, the different banking systems include

• Commercial Banks: A commercial bank is a kind of monetary organisation that controls all transactions requiring the deposit and/or withdrawal of money for the public, in addition to the distribution of loans for investment purposes and other similar activities. These banks are profit-making enterprises that manage business only for the determination of making a profit. Some examples are the State Bank of India and Canara Bank.
• Central Bank: The central bank is accepted as the highest financial institution in the banking system. It is seen as an imperative component of a country’s productive and financial system. The central bank is an autonomous authority in charge of regulating, stabilising and supervising the country’s monetary and banking structures.

Money Creation by Banks: The money supply will alter based on the value of any of its constituents, such as credit unions and time deposits. The public’s inclination to preserve cash balances as opposed to bank deposits has an influence on the money supply. The following major ratios as in Class 12 Macroeconomics Chapter 3 Notes summarise these impacts on the money supply.

• The Currency Deposit Ratio: CDR refers to the amount of currency held by individuals as a percentage of total deposits. For instance, the currency deposit ratio increases over the holiday season as people convert deposits to cash balances in order to cover added expenses.
• The Reserve Deposit Ratio: Banks keep a portion of the money clients keep in their respective bank accounts as reserve money and grant them the rest to various investment enterprises. Vault currency in banks and commercial bank securities with the RBI. Banks utilise this reserve to meet account holders’ need for money. The reserve deposit ratio or order is the percentage of sum deposits that commercial banks preserve as reserves. 

Method to bring forth a healthy reserve deposit ratio:

Under this section of Class 12 Macroeconomics Chapter 3 Notes, students will learn about the different methods to bring forth a healthy reserve deposit ratio.

Qualitative Measures: 

1. Cash Reserve Ratio or CRR: The cash reserve ratio (CRR) is commonly defined as a particular minimum amount of deposits required to be maintained as a reserve by every commercial bank in India as per the condition of the RBI. The Cash reserve ratio will be fixed as per the rules and regulations of the RBI. The RBI lays down the base rate. The rate is fixed, assuring openness in the credit market regarding borrowing and lending.
2. Statutory Liquidity Ratio (SLR): It is basically the reserve requirement that banks must preserve before offering credit to customers. Apart from the cash reserve ratio, banks must keep a fixed percentage of their net demand and time liabilities in liquid assets such as gold, cash, and unencumbered securities. The statutory liquidity rate applies to dated securities issued under the market borrowing programme, treasury bills, and market stabilisation schemes. Banks must report their statutory liquidity rate maintenance to the RBI every Friday, and penalties must be paid if the statutory liquidity rate is not maintained as demanded by RBI.
3. Bank Rate: It is the interest rate imposed by a nation’s central bank on its domestic banks for them to borrow funds. The interest rates charged by central banks are intended to stabilise the economy. Bank rates stir the lending rates of commercial banks. Higher bank rates will result in excessive bank lending rates. The central bank might increase the bank rate to lower liquidity.
4. High Powered Money: It is the money produced by the RBI and the government, in which the public holds the currency, and the banks hold the cash reserves. High-powered money is the total of commercial bank reserves and currency, which denotes the notes and coins held by the general public. The hike in bank deposits and the generation of a money supply are based on high-powered money.

Qualitative Measures

Under this section of the Class 12 Macroeconomics Chapter 3 Notes, students will learn about qualitative measures.

1. Open Market Operation: The central bank sells and purchases securities on the open market to and from commercial banks or the general public. The open market functioning is one of the quantitative techniques adopted by the Reserve Bank of India to ease liquidity conditions throughout the year and lessen the influence on interest and inflation rates. Changes in the cash reserve ratio or CRR, bank rate or open market operations are all examples of the quantitative criterion used to limit the size of the money supply.
2. Bank Rate Policy: Bank rate policy indicates the central bank’s manipulation of the discount rate in order to alter the economy’s credit condition. The bank rate strategy is based on the concept that changes in the bank rate are normally followed by comparable changes in the money market rate, making credit approximately expensive and impacting demand and supply.
3. Sterilisation by RBI: Sterilising is the RBI’s market-based approach for neutralising a portion or all of the monetary impact of foreign inflows. The sterilising procedure is used to change the value of one local currency compared to another and is launched in the foreign exchange market. Sterilisation, in the conventional sense, entails central banks buying and selling on open markets.

The functions of money

The functions of money are allocated into three categories: primary functions, secondary functions, and contingent functions.

Primary Functions:

• A standard gauge of value or unit of value.
• Medium of Exchange.

Secondary Functions:

• Benchmark of deferred payment.
• Transfer of value.
• Store of value.

Contingent Functions:

• Basis of credit.
• Profit statement to the producers
• Ultimate satisfaction to the consumers.
• Liquidity.
• Source of distribution of income
• Foundation of the price mechanism.

The Barter Exchange and the challenges involved in the Barter Exchange

In the Class 12 Macroeconomics Chapter 3 Notes, the barter exchange is explained as the direct exchange of commodities for commodities without using money as the medium of exchange.

• Problems in the Barter Exchange:
• Insufficient amount of double coincidence of wants.
• An inadequate standard measure of value.
• Commodities cannot be divisible.
• Absence of benchmark of deferred payments.
• Exchange of services is not possible in the Barter Exchange.

Supply of Money

In Class 12 Macroeconomics Chapter 3 Notes, the supply of money indicates the aggregate stock of money such as currency notes, demand deposits of banks and coins in the circulation are held by the public at a certain period. The cash balance held by the State Govt and stock of money collected by the banking system is not included in the Supply of Money.

The Bank and Banking System

As per Class 12 Macroeconomics Chapter 3 Notes, the Commercial Bank is the financial institution in which deposits are accepted from the public and loan facilities for investment are provided. The primary purpose of the services offered by commercial banks is to earn profits.

The Functions of Commercial Banks

The functions of commercial banks are categorised into two categories, namely primary functions and secondary functions.

Primary Functions:

• Giving loans.
• Recognising deposits.
• Discounting bill of exchange.

Secondary Functions:

1. a) Agency Functions:

• Fund collection.
• Fund transfer.
• Playing the part of an executor of a will.
• Playing the role of correspondent and representative of the customer and offering a letter of credit to the customers.
• Buying and selling of shares and securities on behalf of the customers.

1. b) General Utility Functions:

• Buying and selling of foreign exchange.
• Secured custody of costly commodities in lockers.
• Issuance of cheques of travellers.
• Endorsing of securities.

The Central Bank and its functions: The apex institute of the financial system of a particular nation is known as the Central Bank.

Roles of Central Bank:

• Bank of issue.
• Bank and Supervisor of the Bankers.
• Credit controlling authority.
• Banker of the Government.
• Foreign exchange reserves are secured in the Central Bank.
• Lender of the ultimate resort.

By going through Class 12 Macroeconomics Chapter 3 Notes, students can learn the implications of a deficit on the economy. There are several measures to legitimate a budgetary deficit which include steps like borrowing from the public, disinvestment and many more. 

Class 12 Macroeconomics Chapter 3 Notes help students understand the concept of the budget and its basics. They will learn about the consequence of receipts and exceeding expenditures. Students often find it hard to gauge the significance of every concept given in the chapter and the weightage it might carry in the exam. Class 12 Macroeconomics Chapter 3 Notes by Extramarks emphasise all the fundamental concepts that students must revise before the exam. This way, students can utilise their time carefully.

Class 12 Macroeconomics Chapter 3 Notes: Exercises and  Solutions.

Class 12 Macroeconomics Chapter 3 Notes will assist the students in framing their answers in the examination. Macroeconomics Chapter 3 Class 12, the concept is explained in detail. Students can write to the point covering the appropriate matter available on the Extramarks. Students can solve their queries by clicking on the links below.

• Very Short Answer Type Questions and Solutions- 5 Questions
• Short Answer Type Questions and Solutions- 7 Questions
• Long Answer Type Questions and Solutions- 6 Questions

The above links are all about Class 12 Macroeconomics Chapter 3 Notes. To learn more about the subject of money and banking,  you can access the Extramarks website.