RBSE Solutions for Class 12 Economics Chapter 17 Money: Meaning, Functions and Importance

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Rajasthan Board RBSE Class 12 Economics Chapter 17 Money: Meaning, Functions and Importance

RBSE Class 12 Economics Chapter 17 Practice Questions

RBSE Class 12 Economics Chapter 17 Multiple Choice Questions

Question 1.
M2 may be calculated from which of the following ?
(a) M1 + Time deposits with commercial banks
(b) M3 + Total deposits with the post office
(c) C + DD
(d) M1 + Saving deposits with post office
Answer:
(d)

Question 2.
Which of the following is a primary function of money ?
(a) Medium of exchange
(b) Measure of currency notes
(c) Payment of bills
(d) Work efficiency of means (resources)
Answer:
(a)

Question 3.
Which of the following is not a function of money ?
(a) Medium of exchange
(b) Measure of value
(c) Basis of credit
(d) Price stability
Answer:
(d)

Question 4.
Which among the following is the prime difficulty of barter exchange system ?
(a) Lack of double coincidence
(b) Non determination of value of currency
(c) Impossibility of future savings
(d) All of these
Answer:
(d)

Question 5.
Exchange of goods with other goods is called –
(a) Money system
(b) Commodity-money system
(c) Barter exchange system
(d) Paper currency system
Answer:
(c)

RBSE Class 12 Economics Chapter 17 Very Short Answer Type Questions

Question 1.
What is barter or exchange system?
Answer:
Barter or exchange system is such a system of the economy in which goods are exchanged for other goods.

Question 2.
Define Money.
Answer:
Money can be defined as something that is generally accepted as a medium of exchange, and which acts as a measure of value, basis of defered payments and means of accumulation of value.

Question 3.
Write down two primary functions of money.
Answer:
Two primary functions of money are :

  1. Medium of exchange
  2. Measure of value.

Question 4.
Write down two problems of barter or exchange system.
Answer:
Two problems of barter or exchange system are :

  1. Problem of double coincidence of wants
  2. Problem in measuring value of a commodity.

Question 5.
How does money provide right of decision to the consumer ?
Answer:
Money is a commodity in terms of which value of all goods and services are measured. Thus, money helps the consumers to take financial decisions. For example : which good should he purchase, and which good he/she shouldn’t purchase.

RBSE Class 12 Economics Chapter 17 Short Answer Type Questions

Question 1.
Explain barter or exchange system with the help of an example.
Answer:
Mohan produces wheat and he has more wheat than he needs. Similarly, Sohan produces cloth and he has more cloth than he needs for himself, then when the need arises, both persons can exchange wheat and cloth and fulfil their individual needs, i.e. Mohan will buy cloth by selling wheat and Sohan will buy wheat by selling cloth. This is what barter system means.

Question 2.
What do you understand by value of money ?
Answer:
Economists have interpreted value of money in different ways, but the most prevalent meaning of value of money is implied in its purchasing power. This means that the quantity of goods and services that could be purchased in exchange of one unit of money, is its value.

For Example – 1 kg wheat costs ₹ 20. It also means that 1 kg of wheat can be purchased for ₹ 20, therefore the purchasing power of 1 kg of wheat is equal to the sum total of ₹ 20.

Question 3.
Explain the importance of money in modern time.
Answer:
In present time, money has an important place in every sphere of economic activity. The operations of economy cannot be imagined today without money. Marshall has rightly said, “Money is that pivot around which the science of economics revolves.” Prof Harris, clarifying the importance of money, says, “All human and divine things, fame and prestige bow down before money.”

It is evident from the above discussion, that in present time, money is of utmost importance.

Question 4.
What are the contingent functions of money ?
Answer:
The contingent functions of money are as follows :
(i) Distribution of Social Income – Money facilitates the just distribution of social income. Production activities are done by the collective efforts of various means of production, hence it is necessary to distribute the income obtained from produced commodity in a just and equitable manner. This has been made possible by money.

(ii) Basis of credit – It is money which has created the credit system. Money has made it possible for banks to extend loans.

(iii) Liquidity of wealth – Money provides liquidity to capital or wealth. Today, any person can sell his house in one city, collect the money and easily purchase another house in another city.

Question 5.
Write down two secondary functions of money.
Answer:
Following are the two secondary functions of money :

  1. Store of Value – Money has made it possible to store value for future use. One can make savings in form of money and also earn interest on these savings. He can fulfil his future needs through his savings.
  2. Basis of Future Payment – Money has made future payments possible, because the value of money has more stability. In present time, all the enchanges are done on credit. How much and when are these credit payments to be made is decided by money.

RBSE Class 12 Economics Chapter 17 Essay Type Questions

Question 1.
Explain in detail the functions of money.
Answer:
Functions of money are placed in four categories :
(i) Primary Functions
(ii) Secondary or subsidiary functions
(iii) Contingent functions
(iv) Other functions of money.
Answer:
(i) Primary Functions – The two primary functions of money are as under. These functions are necessarily done by money in all kinds of economies.

(a) Medium of Exchange – This is an important function of money, which is also its identity. All types of exchange take place through currency as the quality of acceptability exists in money. Manufacturers, sellers, receive money as value for their products, and the buyer pays for the value of goods/services purchased by means of money.

(b) Measure of Value – This is another important function of money. Determination of price of all commodities and services is done only through money. Exchange of goods and services becomes easy if their value is measured in terms of money.

(ii) Secondary or Subsidiary Functions : These are those functions that money performs to help execute its primary functions : Following are the functions :

(a) Basis of Deferred Payment – Money has made it much easier to make payments in future, since, the value of money does not fluctuate much. In present time, most commercial exchanges are based on credit. Loaned amount can easily be recovered in future by means of money.

(b) Means of Store of Value – It was not possible to store value in barter system as commodities had low shelf-life, but the circulation of money has made this work very easy. Money has stability, thus storage of value can easily be done by means of money.

(c) Transfer of Purchasing Power – Purchasing power can easily be transferred from one place to another, or from one person to another by means of money. This also does not entail any financial loss. For example, if a person wants to settle in Jaipur after leaving Bharatpur, he can easily sell his property in Bharatpur, receive the money and use it to buy property in Jaipur. This makes wealth mobile.

(iii) Contingent Functions of Money – Money also performs some contingent functions which make money more convenient and useful. These functions are as follows :

(a) Distribution of Social Income – Money makes the equitable distribution of social income easier. Presently, large scale of production is done, in which various means of production contribute greatly. Distribution of income generated by production, between different means is possible through the use of money.

(b) Basis of Credit – Money is the basis of credit. Today, banking institutions provide various kinds loans on a large scale and provide use of credit letters. This has become possible only due to money.

(c) Liquidity of Wealth – Money lends liquidity to capital and wealth. In liquid form, money can be used immediately for any purpose.

(iv) Other Functions of Money – Apart from the above mentioned functions, money also performs certain other important functions. These are :

(a) Basis of Solvency – Availability of money is an indicator of a person’s capacity of clearance of payments. This is an estimation of that person’s ability to repay loans. The more money a person has, the greater is his capacity to pay loans.

(b) Money acts as a bearer of Options – Money allows a person to make decisions regarding investment of his wealth in various works. It helps people to take financial decisions.

Question 2.
What is barter system of exchange ? Explain its main drawbacks.
Answer:
Meaning of Barter System – A system in which goods and services are directly exchanged for other goods without the use of money is called barter system. In other words, it is the direct exchange of goods produced by one person in return for goods produced by another person. By doing this, both persons obtain the more essential thing in exchange. According to Prof. Jevens— “Exchange of more necessary commodity in return for a relatively less necessary commodity, is barter system”.
Example – Cloth is exchange for milk, and milk is exchanged for cloth, etc. This is known as barter system.

Disadvantages of barter system – Barter system played a very important role in initial stages of human development, and made the obtaining of various necessary commodities in society easy, but as human needs grew rapidly, many difficulties arose in this system, which are given below :

(i) Problem of Double Coincidence of Wants – Double coincidence of wants means what one person wants to sell and buy must coincide with what some other person’s want to buy and sell. This coincidence is difficult. If a farmer wants grams in exchange of surplus wheat, then he will have to find such a person who has surplus of grams and who wants to exchange it for wheat. This coincidence is very difficult in practical life, and unless it is found, barter cannot take place for a less necessary thing.

(ii) Difficulty in Value Measurement – There was no universally accepted value standard measure in barter system, because of which price had to be determined for each new exchange deal – how much milk to accept in exchange for how much wheat, or how much grams to take for how much wheat, and it was difficult for both parties to agree on these prices. Due to lack of agreement, exchange was not possible. Because of this, barter system became a very complicated process.

(iii) Difficulty in storage of value – Every person wants to keep aside a part of his income as savings to secure his future, but this was difficult and risky to do in barter system, since most commodities were perishable and they could spoil or easily be stolen. In addition, storage required large space. Especially milk, fruits, vegetables, etc. food items could not be stored for a long time. Therefore, future storage of excess products was not possible in this system.

(iv) Problem of Divisibility – Some commodities are such that they cannot be divided. If at all they are divided, their utility becomes zero.

This problems arises also when buying an expensive thing in return of a cheap commodity. For example, if a person has a horse and wants to obtain wheat, rice, cloth, etc. It is difficult to find all these three things with one person. If these things have to be obtained from three separate persons, how would the horse be divided. In addition, it is also not necessary that these people would be agreeable to accept the horse. This was a great problem in- barter system.

(v) Problem of Difficulty in deferred payment – In barter exchange, credit transactions were very difficult because it was not possible to calculate the future prices of the commodity. Without credit transactions, trade does not develop, and no economic progress happens in the society.

(vi) Difficulty in Transfer of Value – One of the difficulties that existed in the barter system, was to transfer value from one place to another. Example – If a person wants to relocate himself from Kota to Ajmer, then the price of house received in form of goods would be very difficult to carry to Ajmer.

Question 3.
While explaining the meaning of money, give its definition and throw light on its significance.
Answer:
The English word ‘Money’ has been derived from the word ‘Moneta’ of Latin language. Moneta is another name of Roman Goddess Juno. In ancient times, coins were minted in the temple of goddess Juno, therefore currency was named as money. Money was defined by different economists differently. Hence, money has no single universally accepted definition. Following are the different definitions of money :

  1. According to Hartley Withers, “Money is that commodity through which we sell and purchase goods”.
  2. According to Knapp, “Anything which is declared by the state as money, becomes money”.
  3. According to Marshall, “Money includes all those commodities which are generally accepted without investigation and doubt for purchase and sale of goods and services at a specific place and at a specific time.”
  4. According to Seligman, “Money is one thing that possesses general acceptability”.
  5. According to Kinley, “Money is such commodity which is generally used and accepted as a medium of exchange and measure of value.”
  6. According to FA. Walker, “Money is the thing that is used as a currency”.
  7. According to Kent, “Money is the thing, that is used as a medium of exchange or accepted as a measure of amount”.

It is clear from the above definitions, that economists are not of a common view’ on defining money* but this too is evident that the thing called money should possess the quality of functioning as money, universal acceptance and statutory mandate. Thus, a correct definition could be the following –

“Money is such a thing which has legal and general acceptance in form of medium of exchange, measure of value, storage of value and payment mode of loans.”

Importance of Money – Money has a vital place in present-day economic realm. Prof. Marshall, clarifying its importance, has said, “Money is that pivot around which economic science revolves.” In present age, operation of economy cannot be imagined without money. Because of this importance, the present age is called the age of money. We may understand the importance of money from the following points :

(i) Basis of market system – Money has made the market system convenient and dynamic. Money is the most simple method of exchange in an economy. Therefore, all transactions in a market system are done with the help of money.

(ii) Measure of economic development – Money is an index of measurement of economic development of a country. Governments have been able to formulate and implement programmes of economic development because of money only. The comparison of economic growth of various countries has also become possible because of money.

(iii) Basis of Investment – The circulation of money has made savings possible. Today, people save some money from their present income in order to fulfil their future needs, and earn interest by depositing their saved amount in banks and other financial institutions. Such large amounts thus collected in financial institutions, is invested by them in industries. Private investors also directly invest money in industrial units. In this way, savings become a basis for investment.

(iv) Division of labour and specialisation – In present age, large-scale production is done, which reduces the cost of production of goods. This has become possible only due to division of labour and specialisation. Division of labour and specialisation is not possible without money.

(v) Freedom of decision in economic field – Producers and consumers both are free in the market to take rational decisions due to the use of money. Where consumers spend their money in such a way as to ensure maximum utility, the producers spend wisely on various means of production, so as to maximise their production at least cost.

(vi) Basis of social prestige – In the society, along with economic freedom, money also provides the facility of storage of value which becomes the basis of social prestige. The person with more money has more prestige in the economy.

RBSE Class 12 Economics Chapter 17 Other Important Questions – Answers

RBSE Class 12 Economics Chapter 17 Multiple-Choice Questions

Question 1.
Exchange of goods is possible in :
(a) Limited requirements
(b) Unlimited requirements
(c) Diverse areas
(d) None of these
Answers:
(a)

Question 2.
Which of the following is not the feature of barter system ?
(a) Double coincidence of wants
(b) Limited area
(c) Developed Society
(d) Limited wants
Answers:
(c)

Question 3.
“One important feature of money is to provide liquidity to capital”. Who said this ?
(a) Marshall
(b) Pigou
(c) Keynes
(d) Hartley Withers
Answers:
(c)

Question 4.
“Money is that commodity through which we sell and purchase goods”. Who said this ?
(a) Marshall
(b) Crowther
(c) Hartley Withers
(d) None of these
Answers:
(c)

Question 5.
“Money is that thing that possesses general acceptability”. Who said this ?
(a) Walker
(b) Seligman
(c) Pigou
(d) None of these
Answers:
(b)

Question 6.
Medium of exchange is which function of money ?
(a) Primary function
(b) Secondary function
(c) Contingent function
(d) None of these
Answers:
(a)

Question 7.
Is it possible to abolish money in present time ?
(a) Yes
(b) No
(c) Difficult
(d) None of these
Answers:
(b)

Question 8.
What is Demonetisation ?
(a) Put fake currency out of circulation
(b) Ending the legality of legal currency
(c) Removing entire currency from the system without replacing it with new currency
(d) None of the above
Answers:
(b)

Question 9.
Basis of credit is which function of money ?
(a) Primary
(b) Auxiliary
(c) Contingent
(d) None of these
Answers:
(c)

Question 10.
Function of money is :
(a) Medium of exchange
(b) Measure of value
(c) Basis of store of value
(d) All of these
Answers:
(d)

RBSE Class 12 Economics Chapter 17 Very Short Answer Type Questions

Question 1.
Write two conditions necessary for barter system.
Answer:
Two conditions necessary for barter system are :

  1. Limited wants
  2. Limited area.

Question 2.
Mention the problem in exchange of indivisible goods in barter system.
Answer:
There are commodities which cannot be divided. These are those products or goods whose value becomes nil or zero after division. For example buffalo, cow, goat, etc. It is very difficult to perform exchange with such commodities.

Question 3.
What do you mean by double coincidence of wants ?
Answer:
Double coincidence of wants means the meeting of two persons who agree to exchange one-another’s products.

Question 4.
What do you mean by medium of exchange ?
Answer:
Money acts as a medium for the sale and purchase of goods and services. It means, we can sell and purchase anything with the help of money because it is universally acceptable.

Question 5.
What is the medium to exchange in indirect transaction ?
Answer:
In indirect transaction, the medium of exchange is money.

Question 6.
What is meant by liquidity of money ?
Answer:
Capacity of changing any commodity or property into money without any loss in its value is called liquidity of money.

Question 7.
Is value of money stable?
Answer:
Value of money is more stable in comparison to other commodities.

Question 8.
Write two characteristics of money.
Answer:
Following are the two characteristics of money :

  1. It has the quality of universal acceptance.
  2. It is the most liquid form of property.

Question 9.
What is the reason of money’s birth ?
Answer:
To overcome the difficulties of barter system, money was invented.

Question 10.
What do you mean by M1 ?
Answer:
M1 = C + DD + OD
C = Accumulation of notes and coins with people
DD = Demand deposit (with banks)
OD = Other deposits with Reserve Bank.

Question 11.
What do you mean by M2 ?
Answer:
M2 = M1 + Post Office deposits and deposits in saving accounts in banks.

Question 12.
What do you mean by M3 ?
Answer:
M3 = M1 + Net time deposits with commercial banks.

Question 13.
Who is goddess Juno ?
Answer:
Goddess Juno was worshipped as the goddess of heaven in ancient Rome. Coins were minted in the temple of goddess Juno.

Question 14.
“Money is one thing that possesses general acceptability.” Which economist gave this definition ?
Answer:
This definition was given by economist Seligman.

Question 15.
State the definition gives by Hartley withers.
Answer:
According to Hartley Withers. “Money is that commodity through which we sell and purchase goods.”

Question 16.
What is the Knapp’s definition of money ?
Answer:
“Anything which is declared by the state as money, becomes money”.

Question 17.
What are the drawbacks of a moneyless economy ?
Answer:
Moneyless economy has all the drawbacks of Barter system.

Question 18.
What kinds of measures does RBI adopt in supply of money in the economy?
Answer:
There are four measures adopted by RBI in supply of money – M1, M2, M3 and M4.

Question 19.
What are demand deposits ?
Answer:
Demand deposits are those deposits which have to be returned if demanded by depositors.

Question 20.
What do you mean by demonetization ?
Answer:
It is a process through which the central bank of a country seizes legality of currency in circulation to oust black money and fake currency, and issues new currency.

Question 21.
What is the reason of extinction of barter system ?
Answer:
With the multiplicity of wants and greater need for exchange, barter system proved to be an inefficient system of exchange, and ultimately this system was abolished from the society because of the many problems which arose in its practice.

Question 22.
How does money make saving possible ?
Answer:
There is a stability and certainty in money due to which saving is made easy.

Question 23.
Moneta is a word of which language ?
Answer:
Moneta is a Latin word.

Question 24.
How is money the basis of market system ?
Answer:
Money is the most simple method of exchange in an economy. Therefore, all the transactions in a market system are made with the help of money.

Question 25.
Why do economists advise to control the flow of money in market ?
Answer:
If money is not controlled, problem of inflation arises in the economy. Therefore, it is very important to control the flow of money in market.

Question 26.
How does demonetization remove black money from the economy ?
Answer:
When money ceases to be legal tender due to government order, the people holding unaccounted money are not able to exchange or deposit such money into bank. Then such money becomes mere bits of paper.

Question 27.
What is the benefit of liquidity of money ?
Answer:
By the quality of liquidity, money can be used anywhere and at any time without , any hurdle.

Question 28.
What are the secondary functions of money ?
Answer:
The functions which help in execution of primary functions of money, are called r secondary or auxiliary functions.

Question 29.
Why is money considered an important invention ?
Answer:
Money is considered an important invention because it has made the process of exchange very easy.

Question 30
Write two benefits of money ?
Answer:.
(i) Money has made the process of exchange very easy and purchase of goods and f services very easy.
(ii) Money has made the determination of value of commodities easy.

RBSE Class 12 Economics Chapter 17 Short Answer Type Questions (SA-I)

Question 1.
Write the important things required for exchange in barter system.
Answer:
Following are the important things needed for exchange in barter system :

  1. There must be at least two parties present.
  2. Each party must have such commodities in excess that is needed by one-another.
  3. Both parties must agree to exchange of goods.

Question 2.
Write two drawbacks of barter system.
Answer:
Following are the two drawbacks of barter system :

  1. Problem of double coincidence of wants.
  2. Difficulty in measuring the value of goods.

Question 3.
What do you mean by double coincidence of wants ?
Answer:
Double coincidence of wants is a core characteristic of the barter system of exchange. Double coincidence of wants implies that, the two individuals are in possession of such goods, which they are willing to exchange for the satisfaction of their wants.

Question 4.
What is the reason of popularity of barter system in ancient time ?
Answer:
Following are the reasons of barter system’s popularity in ancient time :

  1. Wants of people were limited.
  2. Market area was limited.
  3. Society was in a very undeveloped state.

Question 5.
Describe evolution of money.
Answer:
In ancient time, various states were ruled by kings and emperors. They used to mint coins according to their own ways. Exchange processes were carried out through the medium of these coins. These coins were made of various metals, like, gold, silver, copper and bronze. These coins were granted legality by the state and it was a legal necessity to accept them. From time to time, changes were made in their forms.

Question 6.
Define Money.
Answer:
There is no universally-accepted definition of money. Economics have defined it in various ways, i.e. According to Hartley withers, Money is that thing by which we buy and sell things”. Kinley defined money differently. He said, “Money is a commodity which is generally used and accepted as a medium of exchange or as a measure of value.”

Question 7.
What are the measures adopted by RBI for supply of money ?
Answer:
Following are the measures adopted by RBI for supply of money:

  1. M1 = C + DD + OD
  2. M2 = M1 + Post office and bank saving account deposits.
  3. M3 = M2 + Net term deposits with commercial banks
  4. M4 = M3 + Total post office savings deposits

Here DD = Demand deposits with commercial and cooperative banks
C = Currency notes and coins with people
OD = Other deposits with RBI

Question 8.
Write down the primary functions of money.
Answer:
Money performs two primary functions as under :

  1. Medium of exchange – All types of exchange takes place through currency as the quality of acceptability exist in money. Money is an ideal medium for conducting transactions in the market.
  2. Measure of Value – Determination of price of a commodity or service is possible only through money. Exchange of goods and services become easy if their value is measured in terms of money.

Question 9.
Write down other functions of money.
Answer:
Apart from primary and secondary functions, money also performs certain other important functions. These are :

  1. Index of clearance of payment: Availability of money is an indicator of capacity of clearance of payment of economic agents. Any person in the society who has money, has the ability to pay.
  2. Money acts as a bearer of options : Money is that product or medium, which helps a person to take economic decisions according to his wishes, and a person can fulfil his desires with the help of money.

Question 10.
State the advantages of money in brief.
Answer:

  1. Money is the pivot of a market system. The entire science of economics revolves around this axis.
  2. Money has made possible division of labour and specialization is the field of production.

Question 11.
Which of the two do you think is the best – Barter system or Money Exchange system? Also state the reason for the same.
Answer:
Money Exchange system is better than the Barter system of Exchange. Following are the reasons for that :

  1. Money overcomes the problem of double coincidence of wants.
  2. The value of any goods or services can be measured accurately through money.
  3. Purchasing power can easily be accumulated through the means of money.

Question 12.
Money is the basis of deferred payments. What is implied by this statement ?
Answer:
There is stability in the value of money. This is why any seller unhesitantly agrees to receive the payment of products at a later time. Payments are made with money in future time also.

Question 13.
Define term deposits.
Answer:
Amounts deposited in banks for a definite period of time are called term deposits. For example, depositing a certain amount in bank for 1 or 2 years. The bank gives a receipt against this deposited amount, which is called term-deposit receipt.

Question 14.
Write two advantages of demonetization.
Answer:
Following are the two advantages of demonetization :

  1. Eradication of black money from the country.
  2. Prevention of circulation of fake currency and terrorist activities.

Question 15.
“Money is a good servant but a bad mistress”. Explain the statement.
Answer:
Money is a good servant since it makes financial work easier, but if it is used more in daily routines, than it might cause inflation which effects general public badly. Therefore it creates problems.

Question 16.
What is the importance of money in politics ?
Answer:
Governments realise taxes from the people. This tax-collection process has been made very simple by use of money. The tax-paying citizens become more aware and keep an alert eye on the activities of government. If the government misuses public money, the people protest against it.

Question 17.
What is the importance of money in production sector ?
Answer:
Money has made the production process simple. Different means of production can be purchased by money easily. With the help of money, cost of production of product can be measured. It is because of money that division of labour and specialisation has become possible, and production on large scale is possible only because of money.

Question 18.
What is the importance of money in a planned economy ?
Answer:
When any country does planning for economic development then a country needs financial, resources to spend on different development programmes. This is not possible without money. Therefore, money is important for a planned economy.

Question 19.
‘Money is the pivot of market system’. Explain this statement in brief.
Answer:
Money is the most simple method of exchange in an economy. Therefore, all transactions in market system are made with the help of money. Therefore, money is the pivot of market system.

Question 20.
How has money made savings possible ?
Answer:
In barter system, savings were done in form of commodities only, but since commodities are perishable, they could not be kept for long periods of time. Today, money has resolved this problem, since money has stability. It can be easily preserved and deposited in banks to earn interest also.

RBSE Class 12 Economics Chapter 17 Short Answer Type Questions (SA-II)

Question 1.
Explain two problems of barter system in detail.
Answer:
Following are the two problems of barter system :
(i) Problem of double coincidence of wants – Double coincidence of wants means what one person wants to sell and buy must coincide with what some other person wants to buy and sell. This coincidence is difficult. If a farmer wants sugar in exchange of surplus food grain, then he will have to find such a person who has surplus of sugar and who wants to exchange it for food grain. This coincidence is very difficult in practical life.

(ii) Difficulty in value estimation – Even if double coincidence is found, exchange still could not be effected, till the quantities if exchange of products could be agreed upon. What quantity of a commodity could be given for what quantity of another product, this was difficult to determine.

Question 2.
Mention two contingent functions of money.
Answer:
Following are the two contingent functions of money:

(i) Distribution of social income – Money makes the process of judicial distribution of social income, easy. It is money which has made possible, the equitable distribution of income in industrial sector, among various components of means of production.

(ii) Basis of credit – The grand edifice of credit is built on the foundation of money only. Nowadays, credit letters are used on a large scale, but even credit letters are in use only because of money. For example, a person can use a cheque only when he has money in his account in the bank.

Question 3.
Mention importance of money in social sector.
Answer:
Development of industries and trade at large scale has become possible because of money. This, in return, helped in raising the standard of living of societies. Measurement of social development became possible because of money. Research in fields of education, health and social welfare became possible by money. Today, government runs many programmes and schemes for the welfare of society, which is possible because of money. Therefore, money plays a very important role in social sector.

Question 4.
Mention the importance of money in revenue sector.
Answer:
Governments of different countries prepare an annual budget these days. Budget is prepared in monetary units. Revenues and expenditures of government are determined in monetary terms. Determination of taxes and their collection is possible because of money. Division of expenses on different schemes and programmes of government under different headings is possible because of money. Today, government runs many programmes and schemes for social security and welfare. Determination of expenses on these schemes and programmes, and valuation of these expenses is not possible without money. Therefore, money plays an important role in revenue sector.

Question 5.
Why is money considered to be an important invention ?
Answer:
In earlier time, when wants were not varied, goods were exchanged for goods. A cobbler would make shoes in return of wheat from the farmer, a farm worker would get grains as a reward for his labour, and so on. This system of exchange was known as barter system. But, with the multiplicity of wants and greater need for exchange, barter system proved to be an inefficient system of exchange. It is then that we invented money- a common medium of exchange. Origin of money is related to the need to facilitate exchange. Therefore, money is considered as an important invention because it has overcome the problems of barter system and made economic transactions very easy.

RBSE Class 12 Economics Chapter 17 Essay Type Questions

Question 1.
Describe Secondary and Contingent functions of money.
Answer:
(A) Secondary Functions of Money – Following three functions are secondary functions of money :

(i) Standard of deferred payment – Money as a standard of deferred payment means that money acts as a ‘standard’ for payments, which are to be made in future. Every day, millions of transactions take place in which payments are not made immediately. Money encourages such transactions and helps in capital formation and economic development of the economy.

(ii) Store of Value – Money as a store of value means that money can be used to transfer purchasing power from present to future, and thus, money is a way to store wealth. Although wealth can be stored in other forms also, but money is the most economical and convenient way. It provides security to individuals to meet contingencies, unpredictable emergencies and to pay future debts. Under barter system, it was difficult to use goods as a store of wealth due to the perishable nature of some goods and high cost of storage.

(iii) Transfer of Value – A value transfer system refers to any system, mechanism, or network of people, that receives money for the purpose of making the funds or an equivalent value payable to a third party in another geographic location, whether or not in the same form. With the help of money, a person can easily transfer his/ her purchasing power to another person. In this way, money also functions in the form of standard of transfer of purchasing power.

(B) Contingent Functions of Money – Following are the contingent functions of money :

(i) Distribution of Social income – Money helps in equitable and judicial distribution of social income among different factors of production. Total output of the country is jointly produced by these factors. So,, the output should be distributed among them. Money helps in distribution of the industrial income in the form of rent, wage, interest and profit, which are expressed in money terms.

(ii) Basis of credit – Credit creation by commercial banks was not possible until money was introduced. Money as a store of value has encouraged savings by people in the form of demand deposits in banks. Such demand deposits are used by commercial banks to create credit.

(iii) Liquidity of Property – Money provides liquidation to wealth and capital. Due to its liquidation, it can be used immediately. This helps in increasing production.

Question 2.
Describe the problems of barter system. How does money overcome these problems of barter system ?
Answer:
Problems of barter system – (See Essay Types Question No. 2 of textbook for answer).

Resolution of Drawbacks of Barter System through Money

(i) Medium of exchange – This is an important function of money which is also its identity. AID types of exchange take place through currency, as the quality of acceptability exists in money. Money is an ideal medium for conducting transactions in the market. This feature of money helped in overcoming the problem of double coincidence of wants of barter system.

(ii) Measure of value – This is another important function. Determination of price of a commodity is possible only through money. Exchange of goods and services becomes easy if their value is measured in terms of money. This feature of money helped in overcoming the problem of difficulty in measuring the value of goods that existed in the barter system.

RBSE Solutions for Class 12 Economics