IGNOU| MONEY, BANKING AND FINANCIAL INSTITUTIONS (ECO - 09)| SOLVED PAPER – (JUNE - 2023)| (BDP)| ENGLISH MEDIUM
BACHELOR'S DEGREE PROGRAMME
(BDP)
Term-End Examination
June - 2023
(Elective Course: Commerce)
ECO-09
MONEY, BANKING AND FINANCIAL
INSTITUTIONS
Time: 2 Hours
Maximum Marks: 50
Weightage: 70%
Note: Attempt any five questions. All questions carry
equal marks.
हिंदी माध्यम: यहां क्लिक करें
1. What do you mean by demand for money? Explain the various motives for holding money with suitable diagrams. 2+8
Ans:- Demand for money is the total amount of money
that people in an economy want to hold. It can also refer to the desire to hold
financial assets such as cash or bank deposits as money.
The demand
for money may arise for a number of reasons, including:-
(i)
Transactions: The value of transactions determines how much money people
are willing to keep.
(ii)
Precautionary: Money is kept for contingencies, such as checking account
balance for home repairs or health care.
(iii)
Speculation: The reason for demand for money may be speculation.
Demand for money
can also be defined as the quantity of money that a consumer wants to purchase
at a certain price in a certain period of time.
According to
Keynes, there are three purposes of holding money:-
(i)
Transactions: Money needed for daily living, such as paying bills, making
purchases and covering expenses
(ii)
Precautionary: Money saved to cover emergency bills or costs like illness
or unplanned repairs
(iii)
Speculation: Money is kept for good investment opportunities
Keynes believed
that the demand for money was positively related to income and negatively
related to the nominal interest rate. He also suggested that all other reasons
for possessing wealth are subcategories of these three major divisions.
Other reasons
for keeping money include:-
(i) Minimum
balance requirement
(ii) Making
autopay bill payments
(iii) To save
up to buy a big item or make a large advance payment
2. What are the characteristics of a good money market?
How far are these found in Indian scenario? 2+8
Ans:- The money market is a part of the financial
market. This involves short-term borrowing and lending. Money markets provide
liquidity to investors and allow efficient allocation of funds across various
sectors of the economy.
Money market is
a market for assets that can act as the closest alternative to cash. Most of
the assets sold here have very short maturities and the objective of this
market is to ensure that those who have excess cash can connect with those who
need cash in the short term.
Some characteristics
of money market:-
(i) Small
amounts can be invested in it in a low-risk setting.
(ii) Some of the
instruments traded here include treasury bills, certificates of deposit,
commercial paper, federal funds, bills of exchange and short-term
mortgage-backed securities.
(iii) It includes
a large number of different types of near-currency assets.
(iv) In this the
transactions are completed without the help of brokers.
A good money
market has the following characteristics:-
(i) Short term
funds
(ii) High
liquidity
(iii) Large
demand and supply of short-term funds
(iv) Active
secondary market
(v) Highly
organized banking system
Other
characteristics of a good money market include:-
(i) Maturity
period
(ii) Conversion
of cash
(iii) No formal
place
(iv) Sub-market
(v) Role of
market
(vi) Existence
of secondary market
(vii) Wholesale
market
(viii) Security
Money market
instruments are considered close substitutes for money due to their high
liquidity. They generate fixed income for the investor and short-term maturity
makes them highly liquid.
A currency
market is considered "developed" if it meets the following
conditions:
(i) Highly
organized commercial banking system
(ii) Presence of
an efficient central bank
(iii) Short-term
government bonds
Every country has
its own currency market. However, it is important to know that even though
these markets may differ from each other geographically, they have some basic
characteristics in common. These features are explained below in this article.
(i)
Miscellaneous: It is important to know that a wide variety of financial
instruments are traded in the money market. There are instruments whose
maturity period is one day and there are instruments whose maturity period is
one year. Furthermore, some instruments are used extensively by banks, some by
governments, and some by other corporate entities.
The money market
is the sum of all these diverse instruments, which have different risk-return
profiles, but the common characteristic is that the money being borrowed is
short-term in nature.
(ii)
Wholesale Market: Another important thing to note about the money market is
that it is a wholesale market. This means that there are no retail participants
in the currency market.
Retail
investors can participate in the currency markets through money market funds
that consolidate funds from various retail investors and transact in bulk. This
is important to note because it means retail investors cannot access this
market on their own.
(iii) Very
large size: The size of the money market is very large. This means that
large-sized transactions are easily absorbed into the market without any
structural changes.
For example,
consider the fact that banks and mega-corporations regularly use money markets
to borrow and lend money. Sometimes, the amount of money to be transacted is
very large. However, these large transactions are easily absorbed by the
market. This is an important feature of the money market as it provides
flexibility to both borrowers and lenders.
(iv) Liquid:
The currency market is one of the most liquid markets in the investment world.
The short-term
nature of the instruments means that investors use this market to park their
discretionary funds. It is possible that investors may wish to use their
discretionary funds to make other investments at any time. Therefore, the
market needs liquidity.
Fortunately,
since there are so many players in the currency market, whenever an investor
wants to sell his investment, he can easily find a buyer. This means that
transactions take very little time to complete and there is no loss of value. Therefore
money market instruments are often referred to as cash equivalents.
(v)
Determines interest rates: A very important feature of the money market is
that it is an important determinant of interest rates in the overall economy.
The money
market also has other smaller markets such as the interbank market. Based on
the demand and supply of funds in the money market the interest rates obtained
from this market become an important determinant for the overall interest rates
in the economy as well as the derivatives market.
Therefore,
currency markets are by no means trivial. Changes in currency markets may prove
to be undercurrents that cause large-scale changes in the core economic system.
(vi) Free
Market: It is important to note that currency markets throughout the world
are largely free. This means that the degree of regulation in such markets is
limited given their size and scale.
The only real
intervention by any government authority comes in the form of rare central bank
interventions in currency markets. Also, it needs to be noted that participants
can freely enter and exit the market at any time.
In most
countries the taxes imposed on such markets are also low. This is because
imposing higher taxes would mean disrupting the pace of short-term transactions
in the economy.
(vii)
Unorganized: Money markets are largely unorganized. This means that there
is no specific building or association of traders that makes up the money
market.
Instead, the
money market is an amorphous body of investors and issuers that changes from
time to time. Depending on country regulations, international participants may
also be allowed to invest in the currency market.
Also, it is
important to note that most transactions in the currency market do not occur
using terminals or any organized system. Instead, a large number of
transactions take place over the counter. As a result, data related to these
transactions is not readily available, making this market one of the opaque
financial markets in the world.
3. Explain the objectives of State Bank of India. Discuss
the progress made by SBI in fulfilling these objectives. 4+6
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