Chapter 3: Money Class 12 Economics NCERT Solutions

Learn about the functions, types, and significance of money with Class 12 Economics Chapter 3 NCERT Solutions. Download free PDFs for quick and organized revision. Scroll down for complete solved questions and important notes.

What You Will Learn in Chapter 3 – Money and Banking

In this chapter, you will understand the concept of money, its evolution from the barter system, and its essential characteristics. You\’ll explore how money is created in modern economies and how banks function in the financial system. The chapter also covers the structure and functions of the Reserve Bank of India (RBI), the central bank of the country, and how it controls credit and maintains economic stability.

Key Topics Covered:

1. Barter System and Its Limitations

• The barter system involved the direct exchange of goods and services.

• It suffered from key issues like lack of double coincidence of wants, difficulty in storing value, and lack of a common measure of value, making trade inefficient.

2. Definition and Functions of Money

Money is anything that is generally accepted as a medium of exchange. It performs four key functions:

1. Medium of Exchange – Facilitates transactions.

2. Unit of Account – Measures the value of goods and services.

3. Store of Value – Stores purchasing power over time.

4. Standard of Deferred Payments – Used to settle debts.

3. Money Supply and Its Measures

Money supply refers to the total volume of money held by the public at a particular time in an economy. It is measured in different ways:

• M1 = Currency + Demand Deposits + Other Deposits with RBI

• M2, M3, and M4 include broader definitions, adding savings and time deposits.

4. Commercial Banks and Credit Creation

Commercial banks play a central role in the economy by accepting deposits and providing loans. One of their key roles is credit creation.

• When a bank gives out loans, it does not physically hand out all the money—it creates deposits in the borrower\’s account. This is called credit creation.

• This process multiplies the money supply in the economy.

5. Functions of Commercial Banks

1. Accepting deposits – Savings, Current, and Fixed Deposits.

2. Lending money – Personal loans, business loans, and overdrafts.

3. Agency functions – Collecting cheques, paying bills, etc.

4. General utility services – Locker facility, foreign exchange dealings.

6. Central Bank – Reserve Bank of India (RBI)

The RBI is India’s central bank, responsible for maintaining the monetary and financial stability of the country.

7. Functions of the Central Bank (RBI)

1. Currency Issuer – Sole authority to issue currency notes in India.

2. Government’s Banker – Manages government accounts and public debt.

3. Banker’s Bank – Regulates and supervises commercial banks.

4. Lender of Last Resort – Provides emergency funds to banks in crisis.

5. Controller of Credit – Uses various tools to manage the money supply and inflation.

8. Quantitative and Qualitative Credit Control Tools

The RBI controls the money supply using:

Quantitative Methods (affect overall credit):

• CRR (Cash Reserve Ratio) – Percentage of deposits banks must keep with RBI.

• SLR (Statutory Liquidity Ratio) – Percentage of deposits banks must maintain in liquid assets.

• Bank Rate – Interest rate at which RBI lends to commercial banks.

• Open Market Operations (OMO) – Buying/selling of government securities.

Qualitative Method
s (target specific sectors):

• Margin Requirements

• Moral Suasion

• Selective Credit Controls

Why Use Our NCERT Solutions for Chapter 3?

Our NCERT solutions for Chapter 3: Money and Banking provide crystal-clear explanations of money creation, the role of banks, and RBI’s regulatory functions. These solutions are perfect for strengthening your conceptual understanding and scoring better in board exams.

Highlights of Our Solutions:

• Simple definitions and clear explanations of complex concepts like money supply measures, CRR, SLR, and credit creation.

• Diagrams and flowcharts to show the credit creation process.

• Well-structured answers to all intext and exercise questions.

• Key distinctions (e.g., Commercial Bank vs Central Bank) clearly laid out.

• Real-life examples to connect textbook concepts to practical banking operations.

NCERT Solutions for Chapter 3 – Money and Banking

Intext Questions:

• Clear explanations on the limitations of barter.

• Detailed definitions and types of money.

• Steps in the credit creation process.

• Differences between RBI and commercial banks.

Exercise Questions (Q.1 to Q.10):

• Full solutions to questions on:

  • Functions of money

  • Components of money supply

  • Role and functions of the RBI

  • Credit control methods used by the RBI

  • Banking system\’s contribution to the economy

Download Chapter 3 Solutions PDF – Money and Banking

Get your free PDF download for Chapter 3, containing:

• Complete NCERT solutions for all textbook exercises.

• Key formulae, diagrams, and concept maps.

• Quick revision summaries and extra examples.

Recommended Preparation Tips:

• Understand how credit is created by banks through an example with a numerical case.

• Memorize the tools of RBI’s monetary policy – both quantitative and qualitative.

• Distinguish clearly between money functions, money supply measures (M1 to M4), and types of deposits.

• Practice difference-based questions, like:

  • Barter vs Money

  • Central Bank vs Commercial Bank

  • CRR vs SLR

Additional Study Resources:

• Chapter 3 Class 12 Notes – Money and Banking

• Flashcards for quick revision

• Previous year board questions and model answers

• MCQs and assertion-reason questions for practice

Mastering Money and Banking

Chapter 3 is a cornerstone of macroeconomics as it builds a clear picture of how the financial system functions and how economic stability is managed through banking and monetary policy. A thorough understanding of this chapter will empower you to analyze economic issues like inflation, liquidity, and financial regulation in real life.