CAPF AC 2021 Q58: Indian Economy – Monetary Policy & Money Supply

CAPF AC 2021, Paper I (General Ability and Intelligence) · Indian Economy

For anything to be recognized as money, it needs to have which of the following characteristics? 1. Act as an intermediate in the exchange process 2. Standard unit for quoting prices 3. Must be easily divisible 4. Have higher value in alternative uses Select the correct answer using the code given below.

(a) 1, 2 and 4
(b) 2 and 3 only
(c) 1, 2 and 3
(d) 1, 3 and 4

Answer: (c) 1, 2 and 3

Explanation

What makes something money

How to think: recall the functions of money and the qualities of good money.

Then find the statement that works against being money.

If a thing is worth more in some other use, people will use it up instead of passing it on.

Statement	Function or quality	Needed?
1. Intermediate in exchange	Medium of exchange	Yes
2. Standard unit for quoting prices	Unit of account	Yes
3. Easily divisible	Divisibility	Yes
4. Higher value in alternative uses	Not a quality of money	No

Example for statement 4: if rice were money and people preferred to eat it, it would stop circulating.

Good money has little or no value in other uses; think of a paper note.

Other qualities: durable, portable, generally accepted and limited in supply.

Answer: (c) 1, 2 and 3.

Why each option is right or wrong

(a) Incorrect. It includes 4 and leaves out divisibility.
(b) Incorrect. It leaves out 1, the medium of exchange function, which is the main one.
(c) CORRECT. Money must be a medium of exchange, a unit of account and divisible.
(d) Incorrect. It includes 4 and leaves out the unit of account function.

Key point

Functions of money: medium of exchange, unit of account, store of value, standard of deferred payments. Qualities: acceptable, durable, divisible, portable, uniform, scarce.

Remember

Money: medium, measure, store; not valuable in other uses.

Common mistakes

Thinking money must have high value in itself, as gold coins once did.
Forgetting that modern fiat money has almost no value in other uses.
Dropping the unit of account function because it sounds like accounting.

Exam tip

Educated guess: a ₹500 note is useless as paper, yet it is money. So statement 4 cannot be a requirement. Remove the options with 4 and only (b) and (c) remain; money is first of all a medium of exchange, so (c).

Sources

NCERT Class XII Economics — Introductory Macroeconomics (Money and Banking: functions of money)
NCERT Class X Economics — Understanding Economic Development (Money and Credit)

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