NCERT Class 12 Economics — Chapter 5: Money and Banking

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Which of the following best defines 'High-Powered Money'?

Official previous-year question

Verified 1 Aug 2026.

Options

ATotal demand deposits and time deposits in the banking system.
BCurrency held by the public and reserves held by commercial banks.
CCurrency notes issued by the Government of India only.
DThe total profit generated by the Reserve Bank of India.

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Solution

The correct option is Currency held by the public and reserves held by commercial banks..

Explanation

High-Powered Money, also known as Reserve Money ($M_0$), Base Money, or Monetary Base, represents the total liability of the monetary authority (Reserve Bank of India) and the Government of India. It serves as the foundation upon which the banking system creates credit and expands the money supply.

Mathematically, it is expressed as:

$H = C + R + OD$

$C$: Currency held by the public (notes and coins).
$R$: Cash reserves of commercial banks (held with themselves and with the RBI).
$OD$: Other deposits with the RBI.

Option Analysis:

Currency held by the public and reserves held by commercial banks. is Correct: It accurately identifies the two primary components of High-Powered Money: currency in circulation among the public and the reserves maintained by commercial banks. These reserves allow banks to create credit, leading to the money multiplier effect.
Total demand deposits and time deposits in the banking system. is Incorrect: Total demand deposits and time deposits constitute the aggregate deposits in the banking system. These are components of Broad Money ($M_3$), not High-Powered Money.
Currency notes issued by the Government of India only. is Incorrect: While currency notes are part of High-Powered Money, this option is restrictive. It excludes bank reserves and implies only notes issued by the Government (like the one-rupee note), ignoring the vast majority of currency issued by the RBI.
The total profit generated by the Reserve Bank of India. is Incorrect: The profit generated by the RBI (surplus income) is transferred to the government as a dividend. It is an income metric, not a measure of the monetary base.

Key Takeaway: High-Powered Money ($H$) differs from Money Supply ($M$). $H$ is the actual currency produced by the central bank and government, whereas $M$ includes deposits created by commercial banks through the credit multiplier mechanism.

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More from Chapter 5: Money and Banking

If the Reserve Bank of India increases the Bank Rate, what is the likely impact on the economy?

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The 'Currency Deposit Ratio' in the banking system is primarily determined by:

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Consider the following statements regarding the functions of money: 1. Economic exchanges without money are referred to as liquidity exchanges. 2. The principal role of money is to facilitate exchanges by acting as a medium of exchange. 3. In a barter system, the search costs increase as the number of individuals in the economy increases. Which of the statements given above is/are correct?

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With reference to the 'Unit of Account' function of money, consider the following statements: 1. If there is a general increase in the price level, the value of money in terms of commodities increases. 2. It allows the value of all goods and services to be expressed in monetary units. 3. It prevents the calculation of relative prices of different commodities. Which of the statements given above is/are correct?

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Consider the following statements regarding money as a 'Store of Value': 1. Money is an asset that can act as a store of value. 2. The value of money is irrelevant for it to perform the function of a store of value. 3. Storage costs of money are considerably lower compared to perishable commodities like rice. Which of the statements given above is/are correct?

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The correct option is Currency held by the public and reserves held by commercial banks..

Explanation

Mathematically, it is expressed as:

$H = C + R + OD$

$C$: Currency held by the public (notes and coins).
$R$: Cash reserves of commercial banks (held with themselves and with the RBI).
$OD$: Other deposits with the RBI.

Option Analysis:

Currency held by the public and reserves held by commercial banks. is Correct: It accurately identifies the two primary components of High-Powered Money: currency in circulation among the public and the reserves maintained by commercial banks. These reserves allow banks to create credit, leading to the money multiplier effect.
Total demand deposits and time deposits in the banking system. is Incorrect: Total demand deposits and time deposits constitute the aggregate deposits in the banking system. These are components of Broad Money ($M_3$), not High-Powered Money.
Currency notes issued by the Government of India only. is Incorrect: While currency notes are part of High-Powered Money, this option is restrictive. It excludes bank reserves and implies only notes issued by the Government (like the one-rupee note), ignoring the vast majority of currency issued by the RBI.
The total profit generated by the Reserve Bank of India. is Incorrect: The profit generated by the RBI (surplus income) is transferred to the government as a dividend. It is an income metric, not a measure of the monetary base.