Money and Banking

When the central bank increases the bank rate, it raises the cost of borrowing for commercial banks. This typically leads to increased lending rates in the economy, causing market interest rates to rise as banks pass on the higher cost to borrowers.

A crossed cheque bears two parallel lines across its face, indicating it cannot be encashed directly over the counter. Crossed cheques must be deposited into a bank account, and the amount is credited to the payee's account. This is a security measure to ensure payment reaches the intended recipient.

Near-money refers to highly liquid assets that can be quickly converted to cash with minimal risk, such as Treasury bills, bonds, debentures, and bills of exchange. Equity shares are NOT near-money because they lack immediate liquidity, their value fluctuates with market conditions, and they cannot be instantly converted to cash without potential loss.

Option 2 is correct.

A Joint Stock Bank's primary obligation is to repay deposits to its customers. Deposits form the main source of funds for banks, and the bank's core liability is to return these funds, either on demand or at agreed maturity. This is why deposit insurance and capital adequacy are critical regulatory requirements.

Security holdings

 A stale cheque is the one that is six months old.

 Option (4) is correct.

 Banks do not pay interest on current account.

The Reserve Bank of India (RBI) is India's central bank, responsible for monetary policy and regulating the banking system. It is not a commercial bank like SBI, Canara Bank, or Oriental Bank of Commerce, which provide banking services to the public.

General acceptability is money's essential feature - people must be willing to accept it in exchange for goods and services. Money does not need to be issued by the state (private currencies existed historically), does not require intrinsic value (fiat currency works), and can be wholly fiduciary.

Money is the most liquid asset because it is universally accepted and can be immediately used to purchase goods and services or converted to other assets. It does not require intrinsic value (fiat money works) and its purchasing power fluctuates rather than remaining constant.

Gresham's Law states that 'bad money drives out good money' - when two forms of money with the same face value but different intrinsic values circulate together, people will spend the money with lower intrinsic value (bad) and hoard the money with higher intrinsic value (good).

A steep reduction in the direct taxation increases the aggregate demand, thereby causing demand pull inflation.

The value of money is inversely related to the price level. When prices rise (inflation), each unit of money buys less - its value falls. When prices fall (deflation), each unit buys more - its value rises.

During deflation, the price level falls, meaning money gains purchasing power. Creditors benefit because they are repaid in money that is worth more than when it was lent. Debtors suffer because they must repay loans with money that has increased in value.

A banker's draft (also called a demand draft) is a payment instrument that can be purchased by anyone with cash, without needing a bank account. Loans, cheque books, and overdrafts all require an established banking relationship with account opening procedures.

When commercial banks engage in credit creation through the lending process, they generate new deposits in the banking system. This process effectively expands the overall money supply in the economy beyond the original base money, which is a core function of fractional reserve banking.

While an increase in money supply is a significant factor that can lead to inflation, it is not an automatic or complete guarantee. Inflation also depends on other critical factors such as the velocity of money, the level of output, and consumer demand. The statement oversimplifies the complex relationship between money supply and inflation.

Borrowers with fixed-rate debts benefit from inflation because the real value of their debt decreases over time. A mortgage represents a fixed nominal obligation, while inflation may increase the borrower's income and asset values, effectively reducing the real burden of repayment.

The lender of last resort function is exclusively performed by Central Banks to maintain financial stability during crises. Commercial banks do not act as lenders of last resort; instead, they borrow from the Central Bank when facing liquidity shortages.

A bank standing order is an automated instruction to make regular fixed payments, which makes it ideal for recurring obligations like mortgage repayments. Utility bills and grocery expenses vary in amount, making them unsuitable for standing orders.

The reserve ratio requirement is a primary quantitative monetary tool that directly controls the lending capacity of commercial banks. By adjusting the proportion of deposits banks must hold in reserve, the Central Bank can expand or contract the money supply.

This is a factual question about the specific Bank Rate prevailing in 2010. The Bank Rate is the rate at which the Central Bank lends to commercial banks, serving as a benchmark for other interest rates in the economy.

'Refer to Drawer' is standard banking terminology indicating that the cheque cannot be honored due to insufficient funds in the drawer's account. It instructs the payee to contact the person who wrote the cheque to arrange alternative payment.

Non-banking financial companies (NBFCs) are required to register with the Reserve Bank of India (RBI) to operate legally. This regulatory framework ensures oversight of financial entities that perform banking-like functions without meeting the legal definition of a bank.

Selling and purchasing securities is the part of open market operations. By selling the securities in an economy, people will have less cash in hand,  reduced cash means reduced purchasing power, reduced purchasing power will result into  reduced credit flow in the economy and ultimately cash disposal of the banks will get diminished.