Justify the following statements with valid arguments : (i) Money supply in an economy is an example of a stock variable. (ii) The Central Bank provides several Banking services to the government. Assuming for a hypothetical economy, Central Bank increases the Reserve Ratio from 20% to 25% and the total primary deposits stand at Rs. 1,000. Explain the effect of rise in Reserve Ratio on credit creation by commercial banks.

Question

Accepted Answer

(i) **Money Supply is a Stock Variable:** Money supply is measured at a particular point in time, not over a period. It represents the total amount of money held by the public at a specific moment, making it a stock concept. For example, when we say M₁ = ₹1,55,612 crores, this is the amount at a given date, not flow over time.

(ii) **Central Bank Services to Government:** The Central Bank provides several services to the government including: maintaining government accounts, collecting receipts and making payments on behalf of the government, managing public debt (issuing and servicing government securities), advising the government on monetary and financial matters, and acting as agent for government transactions with international agencies like IMF and World Bank.