KSLU Solved Question Papers
Money, Banking and International Trade
Previous Year Question Paper with Solution
B.A. LL.B. (Five Years) · Sem 2
2018 Dec Examination
munotes.in
Mumbai
B.A. LL.B. (Five Years) Sem 2 Money, Banking and International Trade 2018 Dec Question Paper with Solutions
First published on munotes.in on 21 October 2026.
Published by munotes.in, Mumbai.
Model answers written and edited by the munotes.in editorial desk.
Passages from this volume may be quoted, in print, online or by an AI system, with credit: name munotes.in and link to this volume's page. The volume may not be reproduced as a whole. Full terms at munotes.in/content-license.
munotes.in is an independent study resource for students of Karnataka State Law University. It is not affiliated with Karnataka State Law University, and is not endorsed by it.
The University does not publish an official answer key for this paper. The answers in this volume are model answers, written to show how a full-mark answer is built. They are a study aid, not an authority on what an examiner marked.
The question paper reproduced here is the paper as set by Karnataka State Law University at the 2018 Dec examination.
Contents
The questions below are the paper as Karnataka State Law University set it at the 2018 Dec examination, in the order it was set.
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2018 Dec examination, reproduced as Karnataka State Law University set them, in the order it set them. Long reading passages are shortened to their first and last lines and our summary; the original paper prints them in full. Only the answers are ours. See the original question paper.
Duration 3 hours · Total marks 100 · 13 questions answered
How to use this volume
Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.
Q1What is money ? Explain the various functions of money.[16]
Answer
For full marks, cover: what money is, approached in three steps (the problem of barter it solves, its essential nature, and the forms it takes in India today with the RBI's measures); why a bank deposit is money (Foley v. Hill); the legal backing of the rupee (RBI Act ss.22, 26) and the demonetisation case; the functions of money in three classes (primary, secondary, contingent) with examples; a worked illustration of one day's use of money; the limits of money's functions; a conclusion.
What is money? Step one: the problem it solves
Money is best understood by what life would be like without it. Under barter, goods are exchanged directly for goods. W. Stanley Jevons, in Money and the Mechanism of Exchange (1875), pointed out three inconveniences.
- Want of coincidence. For a barter, "there must be a double coincidence, which will rarely happen." A potter who wants rice must find a farmer who has rice and wants pots.
- No common measure. Every good must be valued against every other good.
- No means of division. A cow cannot be split to buy a pair of sandals.
Money is the device that removes these three inconveniences.
Step two: the nature of money
1. General acceptability. D. H. Robertson (Money, 1922) defined money as "anything which is widely accepted in payment for goods, or in discharge of other kinds of business obligation." The material does not matter. Shells, gold and paper have all served, because people accepted them.
2. Liquidity. Money is the most liquid asset. It can be spent at once, at its full value, without any cost of sale.
3. Legal backing. Modern money is fiat money: it is money because the State declares it so. Section 22 of the RBI Act, 1934 gives the Reserve Bank the sole right to issue bank notes. Section 26(1) makes every bank note legal tender, guaranteed by the Central Government. A creditor must accept it in payment of a debt.
4. Bank money is a debt. Most money today is not notes but bank deposits. A deposit is a debt the bank owes its customer. In Foley v. Hill, (1848) 2 HLC 28, Foley had paid money into a bank and later sued for an account, as if the bank were his trustee. The House of Lords held that money paid into a bank becomes the money of the banker. The banker is a debtor, bound to repay an equal sum. Why it matters here. Because a deposit is a claim on the bank that people accept in payment, by cheque or UPI, it is money.
Step three: the forms of money in India today
- Currency: notes issued by the RBI and coins issued by the Government.
- Bank deposits: demand deposits, moved by cheque and electronic transfer, and time deposits.
- Digital rupee: the Finance Act, 2022 amended the RBI Act so that a bank note includes a note in digital form. Pilots began on 1 November 2022 (wholesale) and 1 December 2022 (retail).
How the RBI measures it. M0 (reserve money) is currency plus banks' deposits with the RBI. M1 (narrow money) is currency with the public plus demand deposits. M3 (broad money) adds time deposits. Broad money grew 12.1 per cent in the year to 31 December 2025. The ratio of M3 to M0, the money multiplier, was 6.21.
Money, near-money and things that are not money
- Near-money. Some assets are close to money but cannot be spent directly: fixed deposits, treasury bills and short-term bonds. They can be turned into money quickly, which is why broad money (M3) includes time deposits.
- Credit cards. A card is not money. It is a means of borrowing; the debt is later settled in money.
- Cryptocurrency. In Indian law a cryptocurrency is not money. It is nobody's liability, it is not legal tender, and no statute makes it a currency. Since the Finance Act, 2022 it is taxed as a virtual digital asset. By contrast, the digital rupee is a liability of the RBI and is legal tender.
The line between money and near-money shows again that the test is general acceptability in payment, not form.
The law can take money's status away
Vivek Narayan Sharma v. Union of India, 2023 SCC OnLine SC 1 (decided 2 January 2023). Facts. A notification of 8 November 2016 was issued under section 26(2) of the RBI Act. It declared that the existing 500 and 1,000 rupee notes would cease to be legal tender. It was challenged as excessive and arbitrary. Held. By 4 to 1, a Constitution Bench upheld the notification. The section 26(2) power could cover all series of a denomination, and the requirement of the Central Board's recommendation was a safeguard. Why it matters. It shows that a note's character as money, in law, depends on the State's declaration.
The functions of money
A. Primary functions
- Medium of exchange. Money stands in the middle of every sale and purchase. The potter sells pots for money and buys rice with it. The double coincidence is no longer needed, so each person can specialise.
- Measure of value. Money is the common unit in which all values are stated. One price per good replaces endless barter ratios. Accounting, costing and national income all rest on this function.
B. Secondary functions
- Store of value. Money lets people save purchasing power for later. A farmer can sell his crop at harvest and spend the money through the year.
- Standard of deferred payment. Future payments are fixed in money: loans, rent, wages, pensions and insurance. This makes credit and long-term contracts possible.
- Transfer of value. Money moves purchasing power from one place or person to another, as when a worker in Dubai sends money home to Kerala.
C. Contingent functions
- Basis of credit. Banks lend on the strength of deposits, and cheques and digital payments rest on money.
- Distribution of income. The product of land, labour, capital and enterprise is shared in money, as rent, wages, interest and profit.
- Equalising marginal utility and productivity. Consumers and firms compare money prices to get the most from every rupee.
- Liquidity and solvency. Holding money lets a person or firm meet sudden payments and shows the ability to pay debts.
Jevons summed up the primary and secondary functions as "the four functions which money fulfils."
A worked illustration: one day of money
Meena, a teacher in Mysuru, is paid her salary on the first of the month. The amount was fixed in rupees when she was appointed (standard of deferred payment). She compares the price of rice in two shops (measure of value) and pays by UPI (medium of exchange). She puts part of her salary into a fixed deposit (store of value). The bank lends that deposit to a small firm (basis of credit), which pays wages to its workers (distribution of income). Every function of money appears in one ordinary day.
Limits: when money fails
- Inflation weakens the store of value and makes deferred payments unfair. Keynes wrote in A Tract on Monetary Reform (1923): "Thus Inflation is unjust and Deflation is inexpedient."
- Loss of confidence destroys general acceptability. In hyperinflation, people return to barter or foreign currency.
- Misuse. Cash also makes black money and hoarding easier.
This is why the RBI Act, since 2016, makes price stability the primary objective of monetary policy. The inflation target for 2026 to 2031 is 4 per cent.
Conclusion. Money is anything generally accepted in payment and in settlement of debts. It exists to remove the inconveniences of barter that Jevons described. Today it takes the form of RBI notes, bank deposits (which Foley v. Hill shows to be debts of the bank) and the digital rupee. Its status as legal tender comes from sections 22 and 26 of the RBI Act. As Vivek Narayan Sharma shows, that status can be withdrawn by law. Its primary functions are exchange and measurement, its secondary functions storage, deferred payment and transfer, and its contingent functions support credit, distribution, choice and liquidity. All of them depend on keeping the value of money stable.
The rest of the answers
The first answer is free. The rest come with the KSLU B.A. LL.B. Semester 2 solved papers.
You have read the question paper and its first answer in full. Buy the solved papers once and you can read every answer of every solved paper in this semester.
Solved papers: ₹499 Already bought it? Sign in
The question paper itself stays free.
Found an error in this volume? Report it and we will check it against the paper.