question_answer

What is meant by C-C economy? Explain its three major limitations. Or Explain the following functions of the Central Bank.

(i) Banker to the government

(ii) Controller of money supply using the instrument of open market operations.

 

Answer:

Before evolution of money, commodities were exchanged for commodities. This system of exchange known as C-C economy or barter system.                                                   The major limitations of the C-C economy are given below:                                      (i) Lack of Double Coincidence of Wants It is the major drawback of the barter system. It is very rare when the owner of some good or service could find someone who wanted his goods or services and also possessed the same goods or services that the first person wanted. No exchange was possible in the absence of double coincidence of wants.                                            (ii) Lack of Common Measure of Value In barter system, there was absence of a common unit of measurement in which the value of goods and services could be measured. In the absence of a common unit, proper valuation was not possible             (iii) Lack of Standard for Deferred Payments Deferred payments means future payments. In barter system of exchange. It was very difficult to make deferred payments in the form of goods as the quality of goods was subject to change.                                            Or (i) Banker to the Government The Central Bank acts as a banker to the Central Government and State Governments. It carries out all the banking business of the government. It accepts receipts and makes payments on behalf of the government. It provides short-term credit to the government. It also advises the government on banking and financial matters. (ii) Controller of Money Supply Using the Instrument of Open Market Operations Buying and selling of government securities in the open market by the central bank is called open market operations, When central bank buys securities, it makes payments to the sellers who deposit the same in commercial banks. This raises deposits with them and thus, directly increases banks' ability to give credit. When central bank sells securities, the buyers make payments by cheques. As a result, the deposits with the commercial banks decline, reducing banks' ability to give credit.