B.A. LL.B. (Five Years) Sem 2 Money, Banking and International Trade 2021 Mar Question Paper with Solutions

For full marks, cover: what the statement means, with Adam Smith's account of how money makes a "commercial society" possible; the reasons money is crucial to modern development, each with its mechanism and Indian evidence (division of labour, mobilising saving, financing investment through credit, guiding resources through prices, financing the State, linking the economy to world trade, widening participation through digital money, making calculation and planning possible); the place of money in each sector, in a table; why money must be managed if it is to help; a conclusion.

What the statement means

Economic development is a lasting rise in output and living standards, with changes in the structure of the economy. The statement claims that money is not a mere convenience in this process but one of its foundations. Without money, the specialisation, saving and investment on which development rests could not happen on a modern scale.

3. It finances investment through credit. Banks lend pooled saving to firms and farmers, and in doing so create new money. India's money multiplier, broad money divided by reserve money, was 6.21 on 31 December 2025. Broad money grew 12.1 per cent in that year, financing the expansion of trade and production.

4. It guides resources through prices. Money prices and interest rates signal where goods are scarce and where capital earns most. Producers and investors respond, so land, labour and capital move to their most productive uses.

5. It finances the State's role in development. Roads, power, schools and health need public money raised by taxes and borrowing. The Central Government's fiscal deficit is budgeted at 4.3 per cent of GDP in 2026-27. That figure shows how far public spending depends on borrowed money.

6. It links the economy to world trade. Foreign exchange, earned by exports and spent on imports, connects the home economy to world markets. India's total exports of goods and services reached about 825 billion dollars in 2024-25.

Money must be managed

The same power that helps development can harm it.

1. Too much money causes inflation. It eats into saving and hurts the poor most. Inflation stayed above India's 6 per cent upper limit for three quarters from January 2022. The RBI then had to report to the Government under section 45ZN of the RBI Act.
2. Too little money causes deflation and unemployment.
3. Private "money" without backing is risky. Cryptocurrency is not legal tender in India and is taxed as a virtual digital asset since the Finance Act, 2022.

That is why the RBI Act now makes price stability, with growth in mind, the primary objective of monetary policy. The target is 4 per cent inflation.

Conclusion. Money occupies a crucial place in modern development because it makes the division of labour possible. It also mobilises saving, finances investment through credit, guides resources through prices, finances the State and links the economy to world trade. Digital money now extends these gains to people outside the formal economy. As Smith saw, money turns a society into a commercial society. But money helps development only when its value is kept stable. That is why India entrusts its management to the RBI under a legal inflation target.