question_answer

Define money supply and explain its components.

Or

Explain the 'lender of last resort" function of central bank.

Answer:

Supply of money refers to the total stock of money (in the form of currency notes and coins) held by the people of an economy at a particular point of time. The following are the components of money:

(i) Currency component: It includes currency notes and coins which are issued by the Monetary Authority of a country, collectively called the Currency Component of the money supply. In India, RBI issues the currency notes of various denominations (such as Rs. 2, Rs. 5, Rs. 100, Rs. 500, Rs. 2000) and the Government of India issues currency coins and notes of denomination less than and equal to Rs. 1.

(ii) Deposit component: The savings or the current account deposits held by the public in various commercial banks of a country. Apart from the currency notes and coins, the stock of money also includes the Saving Deposits and the Current Account Deposits held by the public in various commercial banks.

Or

Lender of last resort function of Central Bank implies that the Central Bank is under the obligation to provide funds against securities to the commercial bank as and when needed by them. When a commercial bank faces financial crisis and fails to obtain funds from other sources, then central bank provides them the financial assistance in the form of credit. This role of the central bank saves the commercial banks from being bankrupt. Thus, the central bank plays the role of a guarantor for the commercial banks and maintains a sound and healthy banking system in the economy.