CBSE Class 12 Economics Chapter 3: Money NCERT Solutions

Solution: The Barter system is a method of exchange where goods and services are directly traded for other goods and services, without the use of money as an intermediary. It is an ancient form of transaction.

The primary drawbacks of the Barter system are:

1. Lack of double coincidence of wants: For a trade to occur, each party must possess goods or services that the other party desires, and vice versa. This mutual need is often difficult to satisfy simultaneously.
2. Lack of divisibility: Many goods are not easily divisible without losing their value. For example, trading a cow for a few chickens might be difficult if the cow owner only needs one chicken.
3. Difficulty in storing wealth: Storing wealth in the form of goods can be problematic as many items are perishable, require significant storage space, or incur high maintenance costs.
4. Absence of a common measure of value: There is no standard unit to measure the value of different commodities, making it hard to determine fair exchange rates between various goods and services.
5. Lack of standard of deferred payment: It is difficult to arrange for future payments or credit transactions because the value of goods might fluctuate, and the nature of goods may not be suitable for future settlement.

Solution: Money performs several crucial functions that effectively resolve the limitations inherent in the Barter system. As famously stated, "Money is a matter of the following four functions: A medium, a measure, a standard, a store."

Money has overcome the shortcomings of the barter system in the following ways:

(a) Medium of Exchange:

• The barter system suffers from the 'lack of double coincidence of wants', meaning both parties must have something the other wants.
• Money eliminates this problem. Individuals can sell their goods or services for money and then use that money to purchase other goods and services they need. This makes transactions flexible and convenient, as a buyer can acquire goods using money, and a seller can receive money for their goods.

(b) Measure of Value:

• Under the barter system, there was no common unit to measure the value of diverse goods and services, making it difficult to establish exchange ratios.
• Money provides a common denominator, allowing the value of all goods and services to be expressed in a standardized unit. This value is known as the 'price'. By knowing the prices of various commodities, it becomes easy to calculate the exchange ratios between them. As Geoffrey Crowther noted, "Money acts as a standard measure of value to which all other things can be compared."

(c) Store of Value:

• Storing wealth under the barter system was challenging, especially with perishable goods or those requiring large storage spaces and transportation.
• Money, however, can be conveniently stored for future use without significant loss of value. It provides a reliable way to save purchasing power over time.

(d) Standard of Deferred Payments:

• The barter system made it difficult to conduct transactions involving future payments (credit transactions).
• Money serves as a standard for deferred payments. Debtors can promise to make payments on future dates, and creditors can accept these promises with confidence because money is generally acceptable, relatively stable in value, durable, and homogeneous. This facilitates borrowing and lending activities.

Solution: This question has been deleted from the syllabus and is not part of the current curriculum.

Solution: This question has been deleted from the syllabus and is not part of the current curriculum.

Solution: In India, the money supply is defined and measured in several ways, primarily through four measures: M1, M2, M3, and M4. The most commonly used measures are M1 and M3.

M1 (Narrow Money): This is the most liquid measure of money supply. It includes:

1. Currency notes and coins with the public (C): This refers to all the physical currency in circulation, excluding cash held by banks.
2. Demand Deposits (DD): These are deposits held by the public in commercial and co-operative banks that can be withdrawn at any time by the depositor, typically through cheques. Banks do not pay interest on these deposits. This excludes inter-bank deposits.
3. Other Deposits with the RBI (OD): These are deposits held by the Reserve Bank of India (RBI) belonging to entities other than the government and banks. This includes deposits from semi-government public financial institutions (like IDBI, IFCI), foreign central banks, foreign governments, the International Monetary Fund (IMF), the World Bank, etc.

The formula for M1 is:

$$M\_1\; =\; C\; +\; DD\; +\; OD$$

M2: This measure includes all the components of M1 plus savings deposits with post office savings banks.

$$M\_2\; =\; M\_1\; +\; Post\; office\; saving\; deposits$$

M3 (Broad Money): This is a broader measure that includes M1 plus time deposits with the banking system.

$$M\_3\; =\; M\_1\; +\; Time\; deposits\; with\; the\; banking\; system$$

Time deposits are those deposits that cannot be withdrawn without notice and typically earn interest.