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Home / KSLU Solved Papers / B.A. LL.B. (Five Years) / Sem 2 / Money, Banking and International Trade / 2024 Aug / Solutions

B.A. LL.B. (Five Years) Sem 2 Money, Banking and International Trade 2024 Aug Question Paper with Solutions

KSLU Solved Question Papers

Money, Banking and International Trade

Previous Year Question Paper with Solution

B.A. LL.B. (Five Years) · Sem 2

2024 Aug Examination

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Mumbai

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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.

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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 2024 Aug examination.

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Contents

The questions below are the paper as Karnataka State Law University set it at the 2024 Aug examination, in the order it was set.

MarksPage

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MarksPage

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The Paper as Set

The questions in this volume are the questions asked at the 2024 Aug 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 80  ·  20 questions answered

Instructions printed on the paper

  • N.B. (1) Answer all five units. (2) One essay type question and short note/problems is compulsory from each unit. (3) Figures to the right indicate marks. (4) Answer should be written either in English or Kannada completely.

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.

Read the original question paper

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Q1

Unit I

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(a)Critically examine the cash transaction approach to the quantity theory of money.[10]

Answer

For full marks, cover: what the quantity theory of money says; Irving Fisher's cash transaction approach (1911), with the equation of exchange and the meaning of each symbol; his statement of the theory and the three premises on which he rested it; the assumptions; a worked example; the critical examination, giving both its merits and its defects, with Keynes's and modern objections; a table of assumptions against reality; a conclusion.

The quantity theory of money

The quantity theory of money holds that the value of money, or its purchasing power, depends on its quantity. If the quantity of money doubles while other things stay the same, prices double and the value of each unit of money halves. The theory is old. Its best-known form is the cash transaction approach of the American economist Irving Fisher, in The Purchasing Power of Money (1911).

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Fisher's equation of exchange

Fisher treated money as a medium of exchange. Money flows in exchange for goods. So, over a year, the money spent must equal the value of the goods bought. His equation of exchange is:

MV + M'V' = PT

  1. M is the quantity of money in circulation (coins and notes).
  2. V is its velocity, the number of times each unit is spent in a year.
  3. M' is deposit currency, bank deposits that can be drawn by cheque.
  4. V' is the velocity of deposit currency.
  5. P is the general price level.
  6. T is the total volume of transactions, or trade.

The left side is the money spent. The right side is the value of the goods sold. So P = (MV + M'V') / T.

Fisher's statement

Fisher stated that "the level of prices varies directly with the quantity of money in circulation, provided the velocity of circulation of that money and the volume of trade which it is obliged to perform are not changed."

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He rested the conclusion on three premises (chapter VIII):

  1. The equation of exchange holds.
  2. An increase in M normally causes a proportional increase in M'.
  3. An increase in M does not normally affect V, V' or the volume of trade.

He added that "the price level is normally the one absolutely passive element in the equation of exchange." Prices are the effect, not the cause.

Assumptions

  1. V and V' are constant, because they depend on payment habits, which change slowly.
  2. T is constant, because output is fixed by resources and technology at full employment.
  3. M' bears a fixed ratio to M.
  4. P is passive: it is determined, and does not determine anything.
  5. The theory holds in the long run. Fisher admitted that it is not strictly true during "transition periods".
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A worked example

Suppose M = 1,000, V = 5, M' = 500 and V' = 4, with T = 7,000 units of goods.

MV + M'V' = 5,000 + 2,000 = 7,000. So P = 7,000 / 7,000 = 1.

Now M doubles to 2,000. By premise 2, M' doubles to 1,000. V, V' and T do not change.

MV + M'V' = 10,000 + 4,000 = 14,000. So P = 14,000 / 7,000 = 2.

Money has doubled and prices have doubled. The value of money has halved.

Critical examination

Merits

  1. The equation is always true. Money spent must equal the value of what is bought.
  2. It explains extreme inflation. When governments print money on a huge scale, prices rise in step, as the theory predicts.
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  1. It is the basis of monetary control. Central banks restrain the growth of money and credit to restrain prices.
  2. It survived in a new form. Milton Friedman wrote in 1970 that "Inflation is always and everywhere a monetary phenomenon".

Defects

  1. A truism, not a theory. The equation is an identity. It cannot by itself show which way causation runs.
  2. Velocity is not constant. In a slump people hold money and spend less, so V falls. In a boom it rises.
  3. Trade is not constant. The theory assumes full employment. J. M. Keynes showed in The General Theory (1936) that more money first raises output and jobs. Only beyond full employment does it raise prices without limit, which he called "true inflation".
  4. Prices are not passive. A rise in oil prices or wages can push up prices first. Money may then expand to finance them, so causation can run from P to M.
  5. Money is not fixed from outside. The Bank of England explained in 2014 that "the majority of money in the modern economy is created by commercial banks making loans". The quantity of money depends partly on the demand for credit.
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  1. Only the long run. Keynes objected in 1923: "In the long run we are all dead." Policy must deal with the transition periods that Fisher set aside.
  2. It ignores the demand to hold money. The Cambridge cash balance approach asks how much money people wish to hold. That brings in income and interest rates, which Fisher left out.
  3. P is too broad. It mixes the prices of goods, shares and services, which move differently.

Assumptions and reality

Fisher's assumptionReality
V and V' constantThey change with the trade cycle and with payment technology such as UPI
T constant at full employmentOutput and employment vary
P passiveCosts and expectations can move prices first
M set by the authoritiesBank lending creates much of it
Long run onlyPolicy acts in the short run
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Conclusion. Fisher's cash transaction approach states the quantity theory through the equation MV + M'V' = PT. If velocity and trade are constant, prices vary in proportion to money. The equation is always true, and the theory explains why excess money causes inflation in the long run. But its assumptions of constant velocity, constant trade and passive prices do not hold in the short run. Keynes's criticism and the Cambridge approach show what it leaves out. It is best read as a long-run tendency, not an exact law.

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