Money and Banking | Class 12 Economics Notes
By ConceptScroll Team · Published on 17 July 2026 · 3 min read
Money and Banking – this guide gives you a concise, exam-ready overview of Money and Banking from Class 12 Economics, written by ConceptScroll editors and reviewed against the latest NCERT textbook.
3.2 Demand for Money and Supply of Money
This section explains the determinants of demand and supply of money in a modern economy. The demand for money arises primarily because people need money to conduct transactions. The volume of transactions depends on income; hence, higher income leads to higher demand for money. Additionally, the demand for money balances is influenced by the interest rate, which represents the opportunity cost of holding money. When interest rates rise, people prefer to hold interest-bearing assets rather than money, reducing money demand. Conversely, lower interest rates increase money demand. The supply of money consists of currency and bank deposits and is controlled by two key institutions: the central bank and commercial banks. The central bank, such as the Reserve Bank of India (RBI), issues currency and regulates money supply through instruments like bank rate, open market operations, and reserve ratios. Currency issued by the central bank is called high-powered money or reserve money, serving as the base for credit creation. Commercial banks accept deposits and extend loans, earning profits from the difference between interest paid on deposits and charged on loans (spread). The section introduces the concept of money creation by banks through lending, illustrated by the story of a goldsmith named Lala who issues receipts for gold deposits that circulate as money. Banks lend a portion of deposits, assuming not all depositors withdraw simultaneously, thereby creating new deposits and expanding the money supply.
📊 Diagram: See figure_1 and figure_2: 12105D63
🔗 Connection: This section leads to a detailed explanation of money creation by banks and the limits imposed by reserve requirements, discussed in the following section.
Frequently asked questions
The railway is an example of:
Monopoly
Which form of market is also known as price-maker form
Monopoly
1. What is a barter system? What are its drawbacks?
A barter system is a method of exchange where goods and services are directly exchanged for other goods and services without using money. Its drawbacks include: (i) Double coincidence of wants: Both parties must want what the other has. (ii) Lack of common measure of value: Difficult to measure the worth of goods. (iii) Indivisibility of goods: Some goods cannot be divided to match the value of other goods. (iv) Difficulty in storing wealth: Goods may perish or lose value over time. (v) Lack of
2. What are the main functions of money? How does money overcome the shortcomings of a barter system?
Main functions of money are: (i) Medium of exchange: Money facilitates buying and selling without barter. (ii) Unit of account: Money provides a common measure to value goods and services. (iii) Store of value: Money can be saved and used in the future. (iv) Standard of deferred payment: Money is accepted for future payments. Money overcomes barter shortcomings by eliminating the need for double coincidence of wants, providing a common measure of value, enabling divisibility, and allowing storag
Ready to ace this chapter?
Get the full Money and Banking chapter — interactive notes, diagrams, worked solutions, polls and a free practice quiz — in the ConceptScroll app.
Study smarter with ConceptScroll
Daily NCERT-aligned reels, AI doubt solving and chapter quizzes — all free.
Start learning freeContinue reading
- बाज़ार संतुलन | Class 12 Economics Notes
Clear NCERT-aligned notes on बाज़ार संतुलन for Class 12 Economics.
- बाज़ार संतुलन | Class 12 Economics Notes
Clear NCERT-aligned notes on बाज़ार संतुलन for Class 12 Economics.
- बाज़ार संतुलन | Class 12 Economics Notes
Clear NCERT-aligned notes on बाज़ार संतुलन for Class 12 Economics.