KSLU Solved Question Papers
Money, Banking and International Trade
Previous Year Question Paper with Solution
B.A. LL.B. (Five Years) · Sem 2
2020 Dec Examination
munotes.in
Mumbai
B.A. LL.B. (Five Years) Sem 2 Money, Banking and International Trade 2020 Dec Question Paper with Solutions
First published on munotes.in on 21 October 2026.
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The question paper reproduced here is the paper as set by Karnataka State Law University at the 2020 Dec examination.
Contents
The questions below are the paper as Karnataka State Law University set it at the 2020 Dec examination, in the order it was set.
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2020 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.
Q1Define Money. Examine the role of money in the modern economy.[16]
Answer
For full marks, cover: a definition of money from three angles (general acceptability, function, law), with Robertson, Marshall and the RBI Act; what makes an economy "modern" and why that enlarges money's role; the role of money examined in seven fields (exchange and specialisation, calculation, saving and credit, the State's finances, monetary policy, the link with the world, and digital payment), each with its mechanism, Indian evidence and a limit; the debate on whether money matters (Fisher against Keynes); what happens when money's role is disturbed, shown by the 2016 demonetisation and the Supreme Court's decision on it; a summary table; a conclusion.
Defining money
Money is hard to define in one line, so economists approach it from three angles.
- 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 test is acceptance. A thing is money because people take it.
- Function. Alfred Marshall described money as "firstly, a medium of exchange" and secondly "a standard of value, or standard for deferred payments". W. S. Jevons listed "the four functions which money fulfils": a medium of exchange, a common measure of value, a standard of deferred payment and a store of value.
- Law. In India, the RBI alone may issue bank notes (section 22 of the RBI Act, 1934). Under section 26(1), every bank note is legal tender, and its value is guaranteed by the Central Government. Legal tender means money that a creditor must accept in payment of a debt.
Putting the three together: money is anything generally accepted as a means of payment and a measure of value. In most countries the law also backs it as legal tender.
What makes an economy "modern"
A modern economy differs from a simple one in five ways.
- People specialise and buy almost everything they use.
- Banks hold most money as deposits and lend it.
- The State taxes, spends and borrows on a large scale.
- The economy is open to trade and capital from abroad.
- Payments are increasingly digital.
Each of these makes money more central. Adam Smith saw the first step long ago: "Every man thus lives by exchanging, or becomes, in some measure, a merchant, and the society itself grows to be what is properly a commercial society."
The role of money, examined field by field
1. Exchange and specialisation
Role. Money ends the need for a double coincidence of wants. A teacher need not find a farmer who wants lessons. The teacher sells lessons for money and buys food with it. Evidence. Smith called money "the universal instrument of commerce". A modern worker may help make one small part of a phone and buy everything else. Limit. Money does not create the goods. It only lets people trade what they produce.
2. Calculation
Role. Money is the common unit of account. Every price, cost, wage, profit and tax is stated in rupees. Evidence. National income, a firm's balance sheet and the Union Budget are all money sums. Without a common unit, none of them could be added up. Limit. When prices rise fast, the unit itself shrinks. Accounts drawn up in rupees of different years then mislead.
3. Saving and credit
Role. Money links the present and the future. People save in money, and banks lend those savings to firms and households. Evidence. Most modern money is bank money. The Bank of England stated in 2014 that "the majority of money in the modern economy is created by commercial banks making loans". India's money multiplier, broad money divided by reserve money, was 6.21 on 31 December 2025. Limit. Credit can grow too fast and end in bad loans. That is why the RBI keeps a cash reserve ratio of 3 per cent and banks keep an SLR of 18 per cent.
4. The State's finances
Role. The State collects taxes, pays salaries and borrows, all in money. Evidence. The Centre's fiscal deficit is budgeted at 4.3 per cent of GDP for 2026-27. Limit. A State that prints money to pay its bills causes inflation. Section 5 of the FRBM Act, 2003 closes that route: the Centre may not borrow from the RBI except through temporary ways and means advances.
5. Monetary policy
Role. Because money and credit move spending, the central bank can steer the economy by changing their price. Evidence. The RBI's target is fixed under section 45ZA of the RBI Act. For 2026 to 2031 it is 4 per cent inflation, within a band of 2 to 6 per cent. On 7 October 2026 the Monetary Policy Committee raised the repo rate to 5.50 per cent. Limit. Policy works with a lag, and it cannot cure a supply shock such as a failed monsoon.
6. The link with the world
Role. Money in the form of foreign exchange settles trade and investment across borders. Evidence. Indians working abroad sent home about 135.4 billion dollars of remittances in 2024-25. These receipts help pay for India's imports. Limit. A country short of foreign money cannot buy what it needs, as India found in 1991.
7. Digital payment
Role. Money now moves as electronic entries as much as notes. Evidence. The Finance Act, 2022 amended the RBI Act so that a bank note includes a note in digital form. The RBI began a wholesale pilot of the digital rupee on 1 November 2022 and a retail pilot on 1 December 2022. Cryptocurrency, by contrast, is not legal tender. Limit. Digital money depends on secure systems and on people being able to use them.
Does money matter? Two views
The classical view. Irving Fisher's equation of exchange, MV = PT, holds that more money mainly raises prices. Fisher wrote that "The price level is normally the one absolutely passive element in the equation of exchange". On this view money is important for prices but has little lasting effect on real output.
The Keynesian view. J. M. Keynes answered that people live in the short run. In his words, "In the long run we are all dead." In a slump, more money and lower interest rates can raise spending, output and jobs. Beyond full employment, more money only raises prices; Keynes called that "a state of true inflation".
Examined. Both views hold in part. Money's role in the short run is real, which is why central banks act. In the long run, money that grows faster than output ends in inflation, which is why their target is a price target.
When money's role is disturbed: demonetisation
The importance of money is clearest when it is suddenly withdrawn.
Vivek Narayan Sharma v. Union of India, 2023 SCC OnLine SC 1, decided on 2 January 2023:
- Facts. The Central Government issued notification S.O. 3407(E) on 8 November 2016, under section 26(2) of the RBI Act. It declared that bank notes of 500 and 1,000 rupees of all series would cease to be legal tender. The petitioners argued that the power could not be used for all series and that the measure was disproportionate.
- Held. By a majority of 4:1, the Constitution Bench upheld the notification. The power under section 26(2) may be used for all series of a denomination. It is not excessive delegation, because it must be exercised on the recommendation of the RBI's Central Board. The measure passed the proportionality test. Nagarathna J dissented: where the Government starts a demonetisation of all notes of a denomination, it must act by an Act or an Ordinance.
- Why it bears on the question. The case shows that money's status rests on law. A note that was legal tender on the evening of 8 November 2016 then had to be exchanged or deposited within the notified period. The Court held that this period was not unreasonable. For most purposes, the old notes had stopped being money overnight.
Summary table
| Field | Role of money | Indian evidence | Limit |
|---|---|---|---|
| Exchange | Ends barter; allows specialisation | Smith's "commercial society" | Creates no goods itself |
| Calculation | Common unit of account | Budgets, GDP, accounts | Distorted by inflation |
| Saving and credit | Links present and future | Multiplier 6.21 (Dec 2025) | Credit booms; CRR and SLR |
| State's finances | Taxes, spending, borrowing | Deficit 4.3 per cent (2026-27 BE) | FRBM bar on RBI financing |
| Monetary policy | Lever on spending | 4 per cent target; repo 5.50 per cent | Lags; supply shocks |
| World | Settles trade and investment | Remittances 135.4 billion dollars | Foreign exchange shortage |
| Digital | Faster, wider payment | Digital rupee pilots, 2022 | Security and access |
Conclusion. Money is anything generally accepted in payment and as a measure of value. In India the RBI Act makes the rupee note legal tender, guaranteed by the Central Government. In a modern economy money's role is wider than ever. It makes specialised exchange possible and gives the economy its unit of account. It joins saving to investment through bank credit, finances the State and carries monetary policy. It also links India to the world and now moves in digital form. Examined critically, money matters most in the short run, while in the long run excess money ends in inflation. The 2016 demonetisation, upheld in Vivek Narayan Sharma, showed both how much the economy depends on money and that money's status rests on law.
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