KSLU Solved Question Papers
Money, Banking and International Trade
Previous Year Question Paper with Solution
B.A. LL.B. (Five Years) · Sem 2
2026 Jan (100 marks) Examination
munotes.in
Mumbai
B.A. LL.B. (Five Years) Sem 2 Money, Banking and International Trade 2026 Jan (100 marks) 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 2026 Jan (100 marks) examination.
Contents
The questions below are the paper as Karnataka State Law University set it at the 2026 Jan (100 marks) examination, in the order it was set.
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2026 Jan (100 marks) 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. Explain the various functions of money.[16]
Answer
For full marks, cover: why money is hard to define; four kinds of definition (functional, general acceptability, legal, and the narrow and broad measures), with authors; the stages through which money developed; the functions grouped by what they do (in exchange, across time, in the wider economy, and in law and the State); India's legal framework, including the digital rupee; the demonetisation case; the limits on money's functions; a conclusion.
Introduction: the difficulty of defining money
Money is easy to recognise and hard to define. Shells, cattle, gold coins, paper notes, bank balances and now digital tokens have all been money. No single physical quality joins them. So economists define money by what it does and by whether people accept it, not by what it is made of.
Definitions of money
1. Functional definitions. These define money by its functions.
- W. Stanley Jevons (Money and the Mechanism of Exchange, 1875) set out "the four functions which money fulfils". Money is a medium of exchange, a common measure of value, a standard of value for deferred payments and a store of value.
- Alfred Marshall (Money Credit and Commerce, 1923) grouped them under two heads. Money is "firstly, a medium of exchange", and secondly "a standard of value, or standard for deferred payments".
2. The general acceptability definition. This comes from D. H. Robertson (Money, 1922). Money is "anything which is widely accepted in payment for goods, or in discharge of other kinds of business obligation." This definition explains why a bank deposit is money: people accept a cheque or a UPI transfer in payment.
3. The legal definition. Money is what the law declares to be legal tender. Under section 26(1) of the RBI Act, 1934, every bank note is legal tender at any place in India for the amount stated on it. It is also guaranteed by the Central Government. A creditor must accept it in discharge of a debt.
4. Measures of money. In practice, the Reserve Bank measures money in layers. Reserve money (M0) is currency plus banks' deposits with the RBI. Narrow money (M1) adds the public's demand deposits. Broad money (M3) adds time deposits. The money multiplier, the ratio of M3 to M0, was 6.21 on 31 December 2025.
The common thread. Every definition comes back to general acceptability. Whatever people freely accept in payment is money.
How money developed
- Commodity money: grain, cattle and shells.
- Metallic money: coins of gold, silver and copper.
- Paper money: notes, first convertible into metal, now inconvertible.
- Bank money: deposits transferred by cheque and electronic order.
- Digital money: the digital rupee. The Finance Act, 2022 amended the RBI Act so that a bank note includes a note in digital form. A wholesale pilot began on 1 November 2022 and a retail pilot on 1 December 2022.
Each stage kept the same functions while changing the form. The lesson is that money is a social arrangement. Its physical material matters far less than the trust people place in it, and in the institution that issues it.
The functions of money
The functions are best understood by what each one does.
A. Functions in exchange
- Medium of exchange. Money removes the need for a double coincidence of wants that barter requires. A teacher need not find a farmer who wants lessons in return for rice. She sells her services for money and buys rice with it. This function makes specialisation and the division of labour possible.
- Measure of value (unit of account). Money is the common yardstick in which all values are expressed. Prices, costs, profits, wages and national income can be stated and compared only because money gives a single unit.
B. Functions across time
- Store of value. Money lets people save income today and spend it later. It is the most liquid store of value, because it can be spent at once at its full value. Grain may rot and land is hard to sell quickly, but money keeps.
- Standard of deferred payment. Future payments are fixed in money. Loans, rent, salaries, pensions, insurance premiums and bonds all promise a sum of money later. Without this function, there could be no modern credit system.
C. Functions in the wider economy
- Basis of credit. Banks create credit on the strength of the money deposited with them. Cheques, drafts and digital payments all rest on money.
- Distribution of national income. The joint product of land, labour, capital and enterprise is shared in money, as rent, wages, interest and profit.
- Equalising marginal utility and productivity. A consumer spreads spending so that the last rupee on each good gives equal satisfaction. A producer combines factors so that the last rupee on each gives equal output. Money makes both calculations possible.
- Mobility of capital. Money moves savings from one person, place or industry to another. Banks and markets carry savings from savers to investors.
- Liquidity and solvency. Holding money lets a person or firm meet sudden payments and shows the ability to pay debts.
D. Functions in law and for the State
- Legal tender. Money is the means by which debts are lawfully discharged. A creditor cannot refuse legal tender in payment of a debt.
- Public finance. Taxes are collected and public spending is made in money. This lets the State command resources for defence, schools and roads.
The functions at a glance
| Group | Function | What it makes possible |
|---|---|---|
| Exchange | Medium of exchange | Trade without barter |
| Exchange | Measure of value | Prices, accounts, national income |
| Across time | Store of value | Saving |
| Across time | Standard of deferred payment | Credit and contracts |
| Group | Function | What it makes possible |
|---|---|---|
| Wider economy | Basis of credit, distribution, choice, mobility, liquidity | A modern, specialised economy |
| Law and State | Legal tender, public finance | Lawful payment of debts; taxation |
Money and the law in India
Section 22 of the RBI Act gives the Reserve Bank the sole right to issue bank notes. Section 31 forbids anyone else to issue an instrument payable to bearer on demand, so private money cannot compete. Section 26(2) allows the Central Government to declare that a series of notes shall cease to be legal tender. It may act only on the recommendation of the RBI's Central Board.
Vivek Narayan Sharma v. Union of India, 2023 SCC OnLine SC 1 (decided 2 January 2023). Facts. A notification of 8 November 2016 under section 26(2) withdrew legal tender character from the existing 500 and 1,000 rupee notes. It was challenged as beyond the section and arbitrary. Held. By 4 to 1, the Constitution Bench upheld it. The power can be used for all series of a denomination. The Central Board's recommendation is a safeguard against excessive delegation. The decision also met the test of proportionality. Why it matters. The legal function of money, legal tender, is conferred and can be withdrawn by law. The economic functions depend on public confidence, which the law tries to protect.
Limits: when money fails to perform its functions
- Inflation damages the store of value and the standard of deferred payment. Keynes wrote in A Tract on Monetary Reform (1923): "Thus Inflation is unjust and Deflation is inexpedient."
- Loss of confidence destroys acceptability. In a hyperinflation, people return to barter or to foreign currency.
- Money can be misused. Black money and hoarding turn its store of value function against the economy.
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, with a band of 2 to 6 per cent.
Conclusion. Money is anything generally accepted in payment and in discharge of obligations, as Robertson defined it, and the law adds the quality of legal tender. Its functions work in four fields. In exchange it is a medium and a measure. Across time it is a store and a standard of deferred payment. In the wider economy it supports credit, distribution, choice, mobility and liquidity, and in law it settles debts and funds the State. In India, the RBI Act gives the Reserve Bank the sole right of issue and now covers the digital rupee. Vivek Narayan Sharma shows that the law can withdraw a note's status. All these functions survive only while the value of money is stable.
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