Important 40 questions on Money for CUET, Class 12, and various entrance exams.
Case Study 1: Legal Tender Money
- Jane is in a store to make a purchase. She offers to pay with a $100 bill, but the store owner refuses to accept it. Is the store owner obligated to accept the $100 bill as payment? Explain.
Answer: No, the store owner is not obligated to accept the $100 bill. Legal tender laws typically require acceptance of currency for payment of debts, but they do not mandate that businesses must accept specific denominations or forms of currency.
Case Study 2: Debasement of Currency
- In ancient times, rulers would sometimes debase the currency by reducing the amount of precious metal in coins. What were the economic consequences of such actions, and how did it impact the value of money?
Answer: Debasing the currency reduced the value of coins, leading to inflation as people needed more coins to purchase the same goods. It eroded trust in the currency and harmed economic stability.
Case Study 3: Non-Legal Tender Money
- In a country where the official currency is the “Dollar,” some businesses start accepting cryptocurrencies like Bitcoin as payment. What challenges might arise for businesses and customers when using non-legal tender money?
Answer: Challenges may include price volatility, lack of legal protection, and limited acceptance by businesses. Customers may also face issues related to taxation and reporting.
Case Study 4: Limitations of the Barter System
- Imagine a society that relies entirely on barter for trade. Explain how the lack of a common measure of value can hinder economic transactions and growth in this society.
Answer: Without a common measure of value like money, barter transactions become inefficient and complex. It’s challenging to determine fair exchange rates, leading to a limited range of goods exchanged and hindering economic growth.
Case Study 5: Measures of Money Supply
- The central bank of a country decides to include savings accounts in the broadest measure of money supply (M3). How might this change impact the country’s monetary policy and financial stability?
Answer: Including savings accounts in M3 would increase the reported money supply, potentially affecting inflation targeting and interest rate decisions. It could also impact financial stability by altering the perceived liquidity of the banking system.
Case Study 6: Currency Exchange Rate Policies
- A country’s government decides to fix its currency exchange rate to the U.S. dollar, meaning that the local currency will always exchange at a rate of 1:1 with the dollar. Describe the potential advantages and disadvantages of this policy for the country’s economy.
Answer: Advantages include price stability and reduced exchange rate risk for international trade. Disadvantages include loss of control over domestic monetary policy and potential difficulties in maintaining the fixed rate during economic shocks.
Case Study 7: Hyperinflation
- In a country experiencing hyperinflation, prices of everyday goods double within a matter of days. Analyze the impact of hyperinflation on the daily lives of citizens and the overall economy.
Answer: Hyperinflation erodes the purchasing power of money, causing citizens to struggle to afford basic necessities. It leads to economic chaos, loss of savings, and a breakdown of financial systems.
Case Study 8: Central Bank Independence
- A government proposes legislation to exert more control over its central bank’s decision-making process. Discuss the potential consequences of reducing central bank independence for monetary policy and economic stability.
Answer: Reduced central bank independence may lead to politically motivated monetary policy decisions, potentially resulting in higher inflation and less effective control over the money supply, which can harm economic stability.
Case Study 9: Financial Crises
- A financial crisis occurs in a country’s banking sector, leading to a significant loss of confidence in the banking system. Describe the potential domino effects and government responses in such a situation.
Answer: Bank runs, credit freezes, and economic instability can follow a banking crisis. Governments may intervene with bailouts, deposit insurance, or financial reforms to restore confidence and stability.
Case Study 10: Digital Currencies
- Several countries are considering launching their own central bank digital currencies (CBDCs). Discuss the potential benefits and risks of CBDCs for both the government and citizens.
Answer: Benefits include increased payment efficiency and reduced counterfeiting. Risks include privacy concerns, cyber threats, and potential loss of financial intermediaries’ roles.
Case Study 11: International Trade and Currency Exchange
- A country’s currency appreciates significantly against major world currencies. Explain the potential consequences for its exports and imports.
Answer: A stronger currency can make exports more expensive, potentially reducing demand for them, while making imports cheaper, potentially increasing their demand. This can impact a country’s trade balance.
Case Study 12: Electronic Payment Systems
- A country experiencing a rapid shift towards electronic payment systems, reducing the use of physical cash. Analyze the potential benefits and drawbacks of this transition for the economy.
Answer: Benefits include increased efficiency, reduced transaction costs, and improved tracking of financial transactions. Drawbacks may include privacy concerns and increased vulnerability to cyber threats.
Case Study 13: Counterfeiting and Confidence
- Counterfeit currency becomes widespread in a country. Describe the likely consequences for the economy and how the government might respond.
Answer: Widespread counterfeiting erodes confidence in the currency, leading to inflation and economic instability. The government must take measures to combat counterfeiting and restore trust.
Case Study 14: Cryptocurrencies and Financial Inclusion
- A developing country is considering adopting a cryptocurrency to improve financial inclusion. Evaluate the potential benefits and challenges of using cryptocurrencies for financial services.
Answer: Benefits include increased access to financial services for the unbanked population. Challenges include regulatory concerns, price volatility, and technological barriers.
Case Study 15: Gold Reserves
- A country holds significant gold reserves as part of its monetary policy. Discuss the reasons behind this strategy and the potential implications for its economy.
Answer: Holding gold reserves can provide stability and confidence in the currency. However, it may limit flexibility in monetary policy and expose the country to fluctuations in gold prices.
Case Study 16: Digital Wallets
- A company introduced a digital wallet that allows users to make purchases and transfers using smartphones. Explain how this innovation could impact consumer behavior and the broader economy.
Answer: Digital wallets can lead to increased convenience and cashless transactions. They may also generate data on consumer spending patterns, which can inform marketing and policy decisions.
Case Study 17: Negative Interest Rates
- A country’s central bank implements negative interest rates to stimulate economic activity. Discuss the potential effects on saving, investment, and inflation.
Answer: Negative interest rates may discourage saving and encourage borrowing and spending. However, they can also pose challenges for financial institutions and pension funds.
Case Study 18: Hyperinflation and Currency Substitution
- In a country experiencing hyperinflation, citizens start using foreign currencies (e.g., the U.S. dollar) for daily transactions instead of the local currency. Analyze the consequences for the economy and monetary policy.
Answer: Currency substitution can stabilize transactions but weaken the domestic currency further. The central bank may lose control over monetary policy, and the government may face fiscal challenges.
Case Study 19: Economic Sanctions and Financial Isolation
- A country faces severe economic sanctions that limit its access to the global financial system. Describe the potential consequences for its economy and the measures it might take to mitigate these challenges.
Answer: Economic sanctions can hinder international trade, disrupt financial flows, and harm the economy. The country may explore alternative financial networks and seek diplomatic solutions.
Case Study 20: Remittances and Exchange Rates
- A country heavily relies on remittances from its citizens working abroad. Explain how fluctuations in exchange rates can impact the value of these remittances and the country’s economy.
Answer: Depreciation of the local currency can increase the value of remittances, benefiting the economy. Appreciation can have the opposite effect, potentially reducing remittance value.
Case Study 21: Central Bank Digital Currencies (CBDCs) and Financial Stability
- A central bank is considering issuing a CBDC to enhance financial stability. Discuss the potential advantages and risks associated with CBDCs in maintaining financial stability.
Answer: CBDCs can provide better control over the money supply and reduce the risk of bank runs. Risks include potential disintermediation of banks and privacy concerns.
Case Study 22: Deflationary Spirals
- A country experiences deflation, causing consumers to delay purchases in anticipation of lower prices. Describe how this deflationary spiral can impact the economy and monetary policy.
Answer: Deflationary spirals can lead to reduced consumer spending, lower business investments, and unemployment. The central bank may respond with expansionary monetary policies.
Case Study 23: Currency Pegs
- A country pegs its currency to a stronger foreign currency to stabilize exchange rates. Discuss the potential benefits and drawbacks of this strategy for the country’s economy.
Answer: Benefits include exchange rate stability and reduced inflation. Drawbacks may include loss of control over monetary policy and vulnerability to external economic shocks.
Case Study 24: Inclusive Financial Services
- A government launched a financial inclusion program to provide banking services to underserved rural areas. Explain how improved access to financial services can impact economic development.
Answer: Improved financial inclusion can promote savings, investment, and entrepreneurship in underserved areas, fostering economic growth and reducing poverty.
Case Study 25: Quantitative Easing (QE) and Asset Prices
- A central bank conducts QE by purchasing government bonds and other assets. Analyze the potential effects of QE on asset prices and its implications for wealth distribution.
Answer: QE can lead to higher asset prices, benefiting investors but potentially exacerbating wealth inequality. It may also encourage risk-taking behavior.
Case Study 26: Economic Recessions and Monetary Policy
- A country faces an economic recession with high unemployment. Discuss the monetary policy tools the central bank can employ to stimulate economic recovery.
Answer: The central bank can lower interest rates, engage in open market operations, and provide forward guidance to encourage borrowing, spending, and investment.
Case Study 27: Financial Innovation and Risk
- A new financial innovation, such as peer-to-peer lending platforms, gains popularity. Assess the potential benefits and risks of this innovation for borrowers, lenders, and financial stability.
Answer: Financial innovations can improve access to credit but may also pose risks related to default, fraud, and regulatory challenges. Their impact on financial stability depends on their scale.
Case Study 28: Globalization and Exchange Rate Volatility
- A multinational corporation operates in multiple countries and faces exchange rate fluctuations. Discuss how currency volatility can impact the company’s financial performance and strategies to mitigate these risks.
Answer: Exchange rate volatility can affect a multinational corporation’s profits and competitiveness. Strategies to mitigate risks may include hedging and diversification.
Case Study 29: Sovereign Debt Defaults
- A country faces the risk of sovereign debt default. Analyze the potential consequences for its economy, access to international capital markets, and credit rating.
Answer: Sovereign debt default can lead to reduced access to capital markets, higher borrowing costs, and economic instability. It can also impact the country’s creditworthiness.
Case Study 30: Financial Regulations and Systemic Risk
- A country strengthens its financial regulations to reduce systemic risk in the banking sector. Explain how these regulations can enhance financial stability and their potential impact on economic growth.
Answer: Strong financial regulations can reduce the likelihood of banking crises and enhance
confidence in the financial system. However, they may also increase compliance costs and affect lending practices.
Case Study 31: Trade Imbalances and Exchange Rates
- A country consistently runs trade surpluses, accumulating foreign exchange reserves. Analyze the potential effects of these surpluses on the country’s exchange rate and monetary policy.
Answer: Trade surpluses can lead to an appreciating local currency, which can impact export competitiveness. The central bank may intervene to manage exchange rates.
Case Study 32: Financial Technology (Fintech) and Traditional Banks
- Fintech companies offer innovative financial services, challenging traditional banks. Discuss the competitive advantages and disadvantages of both Fintech firms and traditional banks.
Answer: Fintech firms offer convenience and efficiency but may lack regulatory oversight. Traditional banks have established trust but may face higher operational costs.
Case Study 33: Currency Pegs and Speculative Attacks
- A country’s central bank maintains a fixed exchange rate by intervening in the foreign exchange market. Explain how speculative attacks can undermine this fixed exchange rate and lead to a currency crisis.
Answer: Speculative attacks occur when traders bet against a fixed exchange rate, causing central banks to deplete their reserves defending the peg. This can trigger a currency crisis.
Case Study 34: Income Inequality and Monetary Policy
- A country grapples with high-income inequality. Discuss how monetary policy, including interest rate decisions, can impact income distribution and the overall economy.
Answer: Monetary policy can influence income inequality by affecting asset prices and borrowing costs. Its impact on income distribution depends on various factors.
Case Study 35: Financial Crises and Contagion
- A financial crisis erupts in one country, leading to concerns about contagion to neighboring economies. Analyze how financial crises can spread across borders and their potential consequences.
Answer: Financial crises can spread through interconnected financial markets and institutions. Contagion can lead to capital flight, economic instability, and policy coordination among affected countries.
Case Study 36: Central Bank Independence and Accountability
- A country’s government seeks to increase its influence over the central bank’s policy decisions. Discuss the potential consequences of reduced central bank independence for monetary policy effectiveness and credibility.
Answer: Reduced central bank independence can lead to politically motivated policies, potentially harming economic stability and credibility. It may also affect investor confidence.
Case Study 37: Exchange Rate Regimes and Trade Balance
- A country switches from a fixed exchange rate regime to a floating exchange rate system. Explain how this transition can impact the trade balance and exchange rate stability.
Answer: A switch to a floating exchange rate system can lead to greater exchange rate flexibility but may also result in exchange rate volatility and changes in trade balances.
Case Study 38: Trade Tariffs and Currency Depreciation
- A country imposes tariffs on imports to protect domestic industries. Discuss how these tariffs can impact the country’s currency value and the potential consequences for international trade.
Answer: Tariffs can lead to a depreciation of the domestic currency, potentially making exports more competitive. However, they can also trigger retaliatory measures and disrupt global trade.
Case Study 39: Financial Inclusion and Economic Growth
- A country launches a financial inclusion program to provide banking services to rural areas. Evaluate the potential impact of improved access to financial services on economic growth and poverty reduction.
Answer: Enhanced financial inclusion can promote economic growth by channeling savings into investments and fostering entrepreneurship. It can also reduce poverty by expanding access to credit and savings.
Case Study 40: Central Bank Communication and Market Expectations
- The central bank announced a change in its inflation-targeting strategy to focus on average inflation. Analyze how central bank communication can influence market expectations and its implications for monetary policy effectiveness.
Answer: Clear and transparent central bank communication can shape market expectations and help anchor inflation. It can also provide guidance for future policy actions and enhance policy effectiveness.
These case study questions delve into various aspects of money, monetary policy, exchange rates, financial innovation, and their impact on economies and societies.