Money And Banking Class 12 Notes Macro Economics Chapter 3 - CBSE

Chapter: 3

What Are Money And Banking ?

Barter System

Barter refers to a system of exchange in which people used to exchange goods with the goods for the satisfaction of individual wants.

Difficulties of the Barter System

  • Double coincidence of wants
  • Lack of unit of measurement of value
  • Lack of any medium of future payments
  • The lack of the system of storage of value


Money is anything which is generally acceptable as a medium of exchange. At the same time it acts as the measure of value, store of value and the standard of the deferred payments.

Functions of Money

  • Medium of exchange
  • Measure of value
  • Store of value
  • The standard of deferred payments
  • The transfer of purchasing power

Supply Of Money

Supply of money refers to the total stock of money that is available with the public to be used in the transactions at a particular point of time.

Four Alternatives Measures of Money Supply

M1 includes currency + demand deposits of the commercial banks + other deposits held by the RBI.

M2 includes M1 + Deposits with Post office savings bank account.

M3 includes M1 + Net time deposits with the commercial banks.

M4 includes M3 + Total deposits with post offices (except national savings certificate).

Suppliers of Money

  • The Government
  • Central Bank of the country
  • Commercial Banks


Banks are also known as creator of money. Banks create money through the process of credit creation.

Credit Creation

Credit creation is the process of creating demand deposits by the commercial banks out of the primary deposits with the help of credit multiplier. It works through the process of loans.

Commercial Bank

Commercial bank is an institution which deals in money. It accepts money from the public as deposits and lends money to the public in the form of loans. Banks are also known as creator of money.
Banks create money through the process of credit creation.

Central Bank

The central bank of the country is the institution which is the apex bank of the country and controls the entire monetary system of the economy.
Reserve Bank of India is the central bank of India.

Functions of Central Bank

  • Banker’s Bank
  • Lender of the last resort
  • Credit Control
  • Custodian of foreign exchange
  • Clearing house facility
  • Note Issue
  • Government’s Banker

Measures of Credit Control

  • Quantitative Measures

The quantitative measures include bank rate policy, variation in CRR and SLR, variation in the repo rate and reverse repo rate and open market operations.

  • Qualitative Measures

The qualitative measures of credit control include margin requirement, rationing of credit and moral suasion etc.

Quantitative Measures

  • Statutory liquidity ratio

SLR is the fraction of total deposits which commercial  banks have to keep with themselves as cash, gold or securities.

  • Repo rate

It is the rate at which the central bank extends loans  to commercial banks.

  • Reserve reporate

It is the rate at which commercial banks extends loans to the central bank.

  • Open market operations

It refer to the purchase and sale of government securities by the central bank in the open market.

  • Bank rate

It is the rate at which the central bank extends loans to commercial banks.

  • Cash reserve ratio

CRR is the fraction of total deposits which commercial banks have to deposit with the central bank.

Qualitative Measures

  • Margin requirement

It refers to the difference between the value of collateral and the amount of loan sanctioned by the bank.

  • Rationing of credit

It involves capping of loan amounts offered by banks to different sectors.

  • Moral suasion

It is the advice or request to the commercial banks by the Reserve Bank to follow its policies in letter and spirit.