ECO 09 Solved Guess Paper 2026 for IGNOU B.Com (BDP): Money, Banking and Financial Institutions

Money, its functions and its role in an economy

Question: What do you mean by money? Explain its functions. Point out the role of money in an economy.

Meaning of money

Money is anything that is generally acceptable as a means of exchange and that at the same time acts as a measure and a store of value. (Crowther)

Put simply, money is whatever people accept by common consent to pay for goods and services and to settle debts, including payments due in the future.

Functions of money

The textbook groups them under three heads:

1. Primary functions: a medium of exchange that removes the problems of barter, and a measure of value that gives every good a common price yardstick.
2. Secondary functions: a standard of deferred payments for loans, rents and salaries; a store of value, since money is durable and fully liquid; and a means of transferring value across people and places.
3. Contingent functions: the base of the credit system, a tool for distributing national income, a guide to maximising utility and profit, and a source of liquidity and uniformity to wealth.

Role of money in an economy

1. Consumption: money income lets consumers choose what to buy and when to spend.
2. Production: it enables large-scale output, division of labour and price signals on what to produce.
3. Trade: buying, selling and profit decisions all run through the price mechanism.
4. Economic progress: it encourages saving, capital formation and new techniques.
5. Public finance: taxes collected in money let the government fund development priorities.
6. Foreign trade: exports, imports and international cooperation depend on it.

Conclusion: Money is the life-blood of a modern economy. As medium, measure, standard and store, it is the pivot around which every economic activity turns.

Functions of commercial banks in India

Question: Explain the different functions of commercial banks in India.

Meaning. Section 5 of the Banking Regulation Act, 1949 defines banking as accepting deposits of money from the public, for lending or investment, repayable on demand or otherwise and withdrawable by cheque, draft or otherwise. A commercial bank's functions fall into two groups.

Primary functions

1. Accepting deposits: fixed deposits carrying the highest interest, savings deposits with withdrawal limits, current account deposits that pay no interest, and recurring deposits with a fixed monthly instalment.
2. Loans and advances: overdrafts, cash credit, direct loans and discounting of bills, extended to trade, industry, agriculture and export-import business.
3. Credit creation and foreign exchange: modern banks also treat the creation of derivative deposits and dealing in foreign exchange as primary functions.

Secondary functions

1. Agency services: collecting cheques, bills and dividends; paying insurance premiums, taxes and bills for customers; buying and selling securities; acting as trustee, executor or attorney.
2. General utility services: letters of credit, drafts for remittance, underwriting of shares and debentures, guarantees, locker facilities, acting as referee on a customer's standing and supplying business information.

Conclusion: Commercial banks are the biggest source of institutional credit. They pull savings in as deposits, push them out as loans and support trade with a wide range of agency and utility services.

Effects of inflation and measures to control it

Question: (a) Discuss the effects of inflation. (b) Describe the measures for controlling inflation.

Inflation takes place when money income expands relative to the output of work done by the productive agents for which it is the payment. (Pigou)

(a) Effects of inflation

1. Production: mild inflation can lift investment, but hyper-inflation distorts prices, encourages hoarding and misdirects resources.
2. Distribution: entrepreneurs, speculators and hoarders enjoy windfall gains while the poor get poorer.
3. Debtors and creditors: debtors repay in money of lower real value, so creditors lose.
4. Producers and farmers: they gain because product prices rise faster than costs.
5. Wage earners and fixed-income groups: wages lag behind prices, and pensioners and salaried people suffer most.
6. Public morale: arbitrary shifts in wealth weaken ethical standards during hyper-inflation.

(b) Measures to control inflation

1. Monetary measures: the central bank tightens money and credit through bank rate policy, open market operations and higher reserve requirements; selective credit control suits developing economies.
2. Fiscal measures: higher taxes, lower government spending, a surplus budget and incentives to save. Keynes proposed compulsory or deferred saving.
3. Direct controls: price control and rationing of essentials, a wage-profit freeze in galloping inflation, and a push to raise output of necessary goods.

Conclusion: Inflation is a many-headed problem. A single weapon rarely works, so monetary, fiscal and direct measures have to be used together, ideally early.

Objectives and functions of the World Bank

Question: Explain in detail the various objectives and functions of the World Bank.

Introduction. The International Bank for Reconstruction and Development, known as the World Bank, came out of the Bretton Woods Conference of 1944 as the twin institution of the IMF. It was the first organised attempt to regulate long-term capital movements between nations.

Objectives

1. Reconstruction: financing the rebuilding of war-damaged economies after World War II.
2. Development: long-term finance for projects in less developed countries short of domestic capital.
3. Private foreign investment: promoting it through guarantees and participation in private loans, without replacing private capital.
4. Balanced growth of trade: helping poorer economies build export capacity.
5. War-to-peace transition: easing members' shift from a war-time to a peace-time economy.

Functions

1. Lending and guaranteeing: loans from its own capital, from funds borrowed in capital markets and through guarantees that attract private capital, usually for non-military productive projects.
2. Technical assistance: techno-economic surveys, project appraisal, setting priorities and training senior officials through its Economic Development Institute.
3. Stimulating private investment: direct investment, mobilising extra domestic and foreign capital and creating conditions that invite private funds.

Conclusion: Through lending, guarantees, technical help and its affiliates IDA and IFC, the World Bank is the main channel of development finance, though its resources remain small against the needs of developing countries.

The money market and the nature of the Indian money market

Question: What is meant by money market? Explain the nature of the Indian money market.

Meaning. The money market is the centre for dealing in short-term monetary assets, where lenders supply liquidity to borrowers for periods of a day to a few months. Funds move against bills of exchange, treasury bills, promissory notes and short-term securities. Government, firms and individuals demand funds; the central bank, commercial banks and other institutions supply them. Long-term funds belong to the capital market instead.

Nature of the Indian money market

1. Dual structure: an organised sector (RBI, scheduled, foreign, cooperative and post office banks) runs alongside an unorganised one (indigenous bankers, moneylenders, chit funds).
2. Government securities dominate: the bill market is thin, so most trading is in government and semi-government paper.
3. No discount houses: acceptance business is almost absent and traders rely on hundis rather than bills of exchange.
4. Seasonal stringency: in an agricultural economy the busy season from October to April tightens money and pushes interest rates up.
5. Thin banking reach: rural and semi-urban coverage remains inadequate despite branch expansion after 1969.
6. Isolation: exchange controls kept the market largely cut off from foreign money markets.

Conclusion: The Indian money market is not yet as organised as London or New York. The New Bill Market Scheme of 1970 and bank nationalisation fixed some gaps, but full integration is still a work in progress.