B.A. LL.B. (Five Years) Sem 2 Money, Banking and International Trade 2026 Jan Question Paper with Solutions

For full marks, cover: two or three definitions of money with their authors; the common idea of general acceptability; the primary, secondary and contingent functions, each with an example; how Indian law gives the rupee its money character (RBI Act ss.22 and 26) and the demonetisation case; the limits of money's functions under inflation; a conclusion.

Introduction

Money is something every person uses daily but few can define. Economists define it by what it does rather than by what it is made of. Grain, cattle, gold coins, paper notes and bank balances have all served as money at different times. What they share is that people accept them freely in payment.

Definitions of money

1. 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."

1. Medium of exchange. This is the most basic function. Under barter, a farmer with rice who wants cloth must find a weaver who wants rice. This is called the double coincidence of wants, and it rarely exists. Money removes the problem. The farmer sells rice for money and buys cloth with it.
2. Measure of value (unit of account). Money gives a common unit in which the value of every good is stated. A shirt costs 800 rupees and a book 400 rupees, so we know at once that one shirt equals two books. Without this unit, there could be no accounts, no prices and no national income figures.

B. Secondary functions

3. Store of value. Income need not be spent the day it is earned. A person can hold money and spend it later. Money is the most liquid way to store value, because it can be spent at once without loss.
4. Standard of deferred payment. Money makes it possible to fix payments due in the future. A loan, a lease, a salary and an insurance premium are all stated in money. This function is the basis of the whole credit system.

C. Contingent functions

Money in Indian law

Section 22 of the RBI Act gives the Reserve Bank the sole right to issue bank notes in India. Section 31 forbids any other person to issue an instrument payable to bearer on demand. This protects the monopoly of note issue.

Section 26(2) lets the Central Government declare by Gazette notification that a series of notes shall cease to be legal tender. It may do so only on the recommendation of the RBI's Central Board. This is how a note can stop being money.

2. Inflation upsets deferred payments. A lender repaid in money of lower value loses, and the borrower gains. J. M. Keynes wrote in A Tract on Monetary Reform (1923): "Thus Inflation is unjust and Deflation is inexpedient."
3. Loss of confidence ends acceptability. In a hyperinflation, people refuse the currency and return to barter or to foreign money.

This is why the RBI Act, since 2016, states that the primary objective of monetary policy is price stability. Stable prices protect the functions of money.

Conclusion. Money is anything generally accepted as a medium of exchange and as a measure of value, as Robertson's definition shows. Its primary functions are exchange and valuation. Its secondary functions are storing value and settling future payments, and its contingent functions support credit, distribution and choice. In India, the rupee owes its status to sections 22 and 26 of the RBI Act. Vivek Narayan Sharma confirms that the law can withdraw that status from a note. But money serves all these functions only while its value stays stable. That is why price stability is the central bank's first duty.