MONEY AND BANKING (Part – I)

21. What is black money? [U.P. Lower Sub. (Spl.) (Pre) 2002,2003]

(a) It is a Fake currency
(b) It is dirty/bad money
(C) It is an illegal currency
(d) It is an illegal income upon which income tax is not paid

Correct Answer: (d) It is an illegal income upon which income tax is not paid

Solution:Black money includes all funds earned through illegal activities and otherwise legal income that is not recorded for tax purposes. Black money proceeds are usually received in cash from underground economic activity and, as such, are not taxed. It is a big threat for the development of a country's economy. The government had taken many step to bring out illegal money from time to time, such as - Voluntary Disclosure of Income Scheme.

22. Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India? [U.P.S.C (Pre) 2021]

(a) Diversion of resources to the purchase of real estate and investment in luxury housing.
(b) Investment in unproductive activities and purchase of precious stones, jewellery, gold, etc.
(C) Large donations to political parties and growth of regionalism
(d) Loss of revenue to the State Exchequer due to tax evasion

Correct Answer: (d) Loss of revenue to the State Exchequer due to tax evasion

Solution:There is no uniform definition of black money in the literature or economic theory. In fact, several terms with similar connotations have been in vogue, including 'unaccounted income', 'black income', 'dirty money', 'black wealth', 'under- ground wealth', 'black economy', 'parallel economy', 'shadow economy', and 'irregular' or 'unofficial' economy. All these terms usually refer to any income on which the taxes im- posed by the government or public authorities have not been paid. According to the 2019 report of Standing Committee on Finance, the sectors that see the highest incidence of black money include real estate, mining, pharmaceuticals, pan masala, gutkha and tobacco industry, bullion and commodity markets, the film industry, educational institutions and professionals. Loss of revenue to the State Exchequer due to tax evasion is a big problem for the Indian economy which has been highlighted multiple times by the Economic Surveys. Black money (tax evasion) reduces the fiscal resources of the government for running the welfare schemes. Hence, the most appropriate answer is option (d).

23. Which of the following was not the stated objective of demonetization in India? [U.P.P.C.S (Mains) 2017]

(a) Reduction in the use of cash in the economy.
(b) Increasing the use of digital modes of transaction.
(C) Expanding the tax base.
(d) Increasing the growth rate of G.D.P.

Correct Answer: (d) Increasing the growth rate of G.D.P.

Solution:On 8 November 2016, the Government of India announced the demonetization of all Rs. 500 and Rs. 1000 banknotes of the Mahatma Gandhi Series. The government said that the main objective of the exercise was curbing black money, which included income which had not been reported and thus was untaxed; money gained through corruption, illegal goods sales and illegal activities such as human trafficking; and counterfeit currency. Other stated objectives included:

• expanding the tax base and increasing the number of taxpayers;
• reducing the number of transactions carried out by cash;
• increasing the use of digital modes of transaction;
• reducing the finances available to terrorists and radical groups; and
• integrating the formal and informal economy.

24. Paper currency was first started in India in : [U.P.P.C.S (Mains) 2011]

(a) 1862
(b) 1542
(C) 1601
(d) 1880

Correct Answer: (a) 1862

Solution:Paper currency, in the modern sense, traces its origins to the late 18th century with the issues of private banks as well as semi-government banks (the Bank of Bengal, the Bank of Bombay and the Bank of Madras alluded to as the Presidency Banks). Among the earliest issues were those by the Bank of Hindustan (1770-1832), the General Bank of Bengal and Bihar (1773-75), the Bengal Bank (1784-91), amongst others. The Paper Currency Act of 1861 conferred upon Government of India the monopoly of Note Issue bringing to an end note issues of private and presidency banks. After that, the first paper currency was issued in 1862 by the Government. Hence, as per the given options, 1862 is the most appropriate answer.

25. When did the 'Naya paisa' introduced with the decimal system of coinage become, paisa? [Uttarakhand P.C.S (Pre) 2005]

(a) April 1, 1957
(b) April 1, 1965
(c) June 1. 1964
(d) October 2, 1965

Correct Answer: (a) April 1, 1957

Solution:Prior to 1957, Indian rupee was not decimalised and the rupee from 1835 to 1957 AD was further divided into 16 annas. Each anna was further divided into four Indian paisas and each paisa into two Indian pies till 1947 when the pie was demonetized.
In 1955, India amended the "Indian Coinage Act" to adopt the metric system for coinage. Paisa coins were introduced in 1957, but from 1957 to 1964 the coin was called "Naya Paisa" (English: New Paisa).
The Act came into force with effect from 1st April, 1957. The rupee remained unchanged in value and nomenclature. It, however, was now divided into 100 'Paisa' instead of 16 Annas or 64 Pice. For public recognition, the new decimal Paisa was termed 'Naya Paisa'.
On 1 June 1964, the term "Naya" was dropped and the denomination was simply called "One paisa". Naya paisa coins were issued as a part of "The Decimal Series".
Naya paisa coin was withdrawn from circulation and demonetized on 30 June 2011.

26. In India, the decimal coinage system was introduced in the year : [U.P.P.C.S (Mains) 2010 , U.P.P.C.S (Mains) 2005 , U.P.P.C.S (Pre) 1995]

(a) 1951
(b) 1955
(C) 1957
(d) 1960

Solution:Prior to 1957, Indian rupee was not decimalised and the rupee from 1835 to 1957 AD was further divided into 16 annas. Each anna was further divided into four Indian paisas and each paisa into two Indian pies till 1947 when the pie was demonetized.
In 1955, India amended the "Indian Coinage Act" to adopt the metric system for coinage. Paisa coins were introduced in 1957, but from 1957 to 1964 the coin was called "Naya Paisa" (English: New Paisa).
The Act came into force with effect from 1st April, 1957. The rupee remained unchanged in value and nomenclature. It, however, was now divided into 100 'Paisa' instead of 16 Annas or 64 Pice. For public recognition, the new decimal Paisa was termed 'Naya Paisa'.
On 1 June 1964, the term "Naya" was dropped and the denomination was simply called "One paisa". Naya paisa coins were issued as a part of "The Decimal Series".
Naya paisa coin was withdrawn from circulation and demonetized on 30 June 2011.

27. Which one of the following statements correctly describes the meaning of legal tender money? [U.P.S.C (Pre) 2018]

(a) The money which is tendered in courts of law to defray the fee of legal cases.
(b) The money which a creditor is under compulsion to accept in settlement of his claims.
(C) The bank money in the form of cheques, drafts, bills of exchange, etc.
(d) The metallic money in circulation in a country.

Correct Answer: (b) The money which a creditor is under compulsion to accept in settlement of his claims.

Solution:Legal tender is a coin or a banknote that is legally tenderable for discharge of debt or obligation. In other words, legal tender money is a form of money recognized by law as a means to settle a public or private debt or to meet a financial obligation, including tax payments, contracts, and legal fines or damages. Hence, it is the money which a creditor is under compulsion to accept in settlements of his claims. The metallic money (coins) in circulation in a country is part of legal tender which includes banknotes also. But, there may be some limitations (as in India) for coins to be legal tender in payment.

The coins issued by Government of India under Section 6 of The Coinage Act, 2011, shall be legal tender in payment or on account provided that a coin has not been defaced and has not lost weight so as to be less than such weight as may be prescribed in its case. Coin of any denomination not lower than one rupee shall be legal tender for any sum not exceeding one thousand rupees. Fifty paise (half rupee) coin shall be legal tender for any sum not exceeding ten rupees. While anyone cannot be forced to accept coins beyond the limits mentioned above, voluntarily accepting coins for amounts exceeding the limits mentioned above is not prohibited.

Every banknote issued by Reserve Bank of India (Rs. 2, Rs. 5, Rs. 10, Rs. 20, Rs. 50, Rs. 100, Rs. 200, Rs. 500 and Rs. 2000), unless withdrawn from circulation, shall be legal tender at any place in India in payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government, subject to provisions of sub-section (2) Section 26 of RBI Act, 1934. Rs. 1 notes issued by Government of India from time to time are also legal tender. Rs. 500 and Rs. 1000 banknotes of Mahatma Gandhi series (old) issued up to November 08, 2016 have ceased to be legal tender with effect from the midnight of November 8, 2016.

28. The Reserve Bank of India has the power to print currency notes of Rupees upto : [U.P.P.S.C (R.I) 2014]

(a) Rs. 10,000
(b) Rs. 15,000
(C) Rs. 5,000
(d) Rs. 1,000

Correct Answer: (a) Rs. 10,000

Solution:The Reserve Bank of India (RBI) has the power to print currency notes in the denomination of upto Rs. 10,000. The highest denomination note ever printed by the RBI was the Rs. 10,000 note in 1938 which was demonetized in 1946. The Rs. 10,000 note was again introduced in 1954 which was demonetized in 1978. As per Section 24 (1) of the RBI Act, 1934, bank notes issued by the RBI shall be of the denominational values of Rs. 2, Rs. 5, Rs. 10, Rs. 20, Rs. 50, Rs. 100, Rs. 500, Rs. 1,000, Rs. 5,000 and Rs. 10,000 or of such other denominational values, not exceeding Rs. 10,000, as per the Central Government may, on the recommendation of the Central Board, specify in this behalf. As per the RBI's Annual Report 2022, presently, the Reserve Bank issues banknotes in denominations of Rs. 2, Rs. 5, Rs. 10, Rs. 20, Rs. 50, Rs. 100, Rs. 200 and Rs. 500. However, printing of notes in the denominations of Rs. 2 and Rs. 5 has been discontinued (and they are not currently being issued) but such notes issued earlier by the RBI continue to be legal tender. Rs. 1 note issued by the Government of India from time to time also continue to be legal tender.

Note : The Rs. 2000 denomination banknote was introduced in November, 2016 under Section 24 (1) of RBI Act primarily with the objective of meeting the currency requirements of the economy in an expeditious manner after withdrawl of the legal tender status of all Rs. 500 and Rs. 1000 banknotes in circulation at that time. Printing of Rs. 2000 banknotes was stopped in 2018-19 and RBI decided to withdraw Rs. 2000 banknote from circulation in 2023. However, the Rs. 2000 banknote will continue to maintain its legal tender status. Public and entities holding such notes were initially asked to either exchange or deposit them in bank branches by 30 September, 2023. The deadline was later extended to 7 October, 2023. Deposit and exchange services at bank branches were discontinued after that. Starting 8 October, 2023, individuals have been provided with the choice of either exchanging the Rs. 2000 banknotes or having the equivalent sum credited to their bank accounts at the 19 Issue Offices of the RBI.

29. Note issuing department of RBI should always possess the minimum gold stock of worth : [U.P. Lower Sub. (Pre) 2008]

(a) Rs 85 crore
(b) Rs 115 crore
(C) Rs 200 crore
(d) None of the above

Correct Answer: (b) Rs 115 crore

Solution:The system of note issue by the Reserve Bank of India was founded on the proportional reserve system which was replaced by a system of minimum holding of foreign securities (Minimum Reserve System) of Rs. 400 crore and gold coin and bullion of Rs. 115 crore or a total of Rs. 515 crore in 1956. Under the Reserve Bank (Second Amendment) Act, 1957, the aggregate value of gold coin, gold bullion and foreign securities in the Issue Department was stipulated at not less than Rs. 200 crore at any time, of which the value of gold coin and bullion should at no time be less than Rs. 115 crore. These stipulations have not been revised since then.

30. In India 'currency Notes issue system' is based on : [U.P.P.S.C. (GIC) 2010 , U.P.PC.S (Mains) 2004, 2007]

(a) Proportional reserve system
(b) Minimum reserve system
(C) Fixed exchanged rate system
(d) Full convertibility system

Correct Answer: (b) Minimum reserve system

Solution:The system of note issue by the Reserve Bank of India was founded on the proportional reserve system which was replaced by a system of minimum holding of foreign securities (Minimum Reserve System) of Rs. 400 crore and gold coin and bullion of Rs. 115 crore or a total of Rs. 515 crore in 1956. Under the Reserve Bank (Second Amendment) Act, 1957, the aggregate value of gold coin, gold bullion and foreign securities in the Issue Department was stipulated at not less than Rs. 200 crore at any time, of which the value of gold coin and bullion should at no time be less than Rs. 115 crore. These stipulations have not been revised since then.