Money, Banking and Public Finance
The Money, Banking and Public Finance domain tests the functions of money, money supply, credit creation, central banking and budget concepts. You must connect monetary-policy tools and fiscal definitions to their effects.
Core rules and concepts
- Functions of money: medium of exchange, unit of account, store of value and standard of deferred payment.
- Money supply: M1 = currency with the public + demand deposits + other deposits with RBI; M2 = M1 + savings deposits with post office savings banks; M3 = M1 + net time deposits with banks; M4 = M3 + total post office deposits.
- Credit creation depends on the cash reserve ratio: deposit multiplier = 1/CRR.
- RBI functions: currency issue, banker to government, banker’s bank, lender of last resort, credit control and foreign exchange management.
- Fiscal deficit = total expenditure − total receipts excluding borrowings.
Worked example
A bank receives a new deposit of ₹1,000 crore and the CRR is 10%. It keeps ₹100 crore and can lend ₹900 crore. If that amount returns as a deposit, the process continues. Total credit creation = initial deposit × 1/CRR = 1,000 × 10 = ₹10,000 crore. This assumes no cash leakage and no excess reserves.
Traps that cost marks
Do not treat CRR and SLR as identical. Do not count borrowing as a revenue receipt. Do not say RBI prints unlimited money without backing or management. Do not confuse fiscal deficit with revenue deficit.