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Economics · 2025 · 6 marks
CBSE 2025 · Region 4 · Set 1 · Q17
(a) Elaborate the process of Credit Creation using a suitable numerical example. (b) Read the following text carefully: “This function of money…
(a)
Elaborate the process of Credit Creation using a suitable numerical example.
(b)
Read the following text carefully :
“This function of money provides different items to be evaluated against a common standard. It allows comparison of prices and keeping financial records.”
(i)
On the basis of the given text, identify the indicated function of money.
(ii)
List any other two functions of money.
Marking-scheme solution
(a)
The process of credit creation is based on the assumptions that:
entire banking system is a single unit.
all transactions are routed through the bank only.
| Rounds | Deposits | Loans | Reserves ($\displaystyle 20$%) |
| I | $\displaystyle 1,000$ | $\displaystyle 800$ | $\displaystyle 200$ |
| II | $\displaystyle 800$ | $\displaystyle 640$ | $\displaystyle 160$ |
| III | $\displaystyle 640$ | $\displaystyle 512$ | $\displaystyle 128$ |
| … | … | … | … |
| Total | $\displaystyle 5,000$ | $\displaystyle 4,000$ | $\displaystyle 1,000$ |
When a commercial bank receives primary deposits (say ₹ $\displaystyle 1,000$), it has to maintain some statutory reserves (say $\displaystyle 20$%). The remaining amount is made available for loans. The lent sum of money is received back in the next round of deposits as secondary deposits.
$\displaystyle \text{Total Deposits} = \text{Primary Deposits} \times \frac{1}{\text{Reserve Ratio}}$
$\displaystyle = 1000 \times \frac{1}{0.2}$
= ₹ $\displaystyle 5,000$
This process continues till sum total of reserves becomes equal to primary deposits.
(b)(i)
The indicated function of money is ‘Unit of account’.
(ii)
Two other functions of money are:
Medium of exchange.
Standard of deferred payments.
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CBSE Class 12 Economics past-paper question from the 2025 board exam, with the answer as CBSE’s own marking scheme gives it. Where our answers come from.