Skip to content

Demonetisation ICSE Class 10 Economics Notes and Answers

questionbuddy.in/icse/class-10/economics/demonetisation

EconomicsICSE Class 10 · Chapter 12

Demonetisation ICSE Class 10 Economics: Meaning, Aims and Effects

Updated 14 October 2026 · Fact-checked

Demonetisation means withdrawing the legal tender status of a currency unit, so the old notes stop being valid money and must be exchanged or deposited. ICSE Class 10 asks for a brief understanding: its meaning, India's 2016 demonetisation of ₹500 and ₹1,000 notes, its objectives such as curbing black money and fake notes, and its effects.

What Demonetisation is about

Money is money because the law says so: currency notes are legal tender. The government and the central bank can also take that status away. When a denomination of currency is declared no longer legal tender, it is demonetised.

India's best-known example came on 8 November 2016, when the ₹500 and ₹1,000 notes then in circulation ceased to be legal tender from midnight. People were given time to deposit or exchange them at banks, and new ₹500 and ₹2,000 notes were introduced. India had demonetised high-value notes earlier too, in 1946 and 1978.

The syllabus asks only for a brief understanding, so learn: the meaning of demonetisation, the aims (black money, counterfeit notes, terror financing, a digital economy, a wider tax base) and the main effects, both short-term difficulties and longer-term changes. Board questions have also used the 2023 withdrawal of ₹2,000 notes as a stimulus; note that the RBI said those notes remained legal tender, so it was a withdrawal from circulation rather than a demonetisation in the strict sense.

Weightage: CISCE publishes no chapter weightage. The paper has a compulsory Section A (40 marks: 16 one-mark MCQs and three 8-mark questions of four 2-mark parts) and Section B, where you answer any four of six 10-mark questions (two 5-mark parts each).Source: CISCE ICSE Economics (641) specimen paper structure, 2025, retained for 2027 by the CISCE circular of 9 October 2026

Key concepts

Meaning of demonetisation

Demonetisation is the act of stripping a currency unit (a particular denomination of notes or coins) of its status as legal tender. After demonetisation, those notes can no longer be used for payments or to settle debts; holders must deposit or exchange them at banks within a fixed period, and new currency is usually introduced in their place (remonetisation).

It is linked to the legal definition of money: money is whatever the law declares to be legal tender, so the law can also withdraw that status.

Worked example

(2 marks) What is demonetisation?

Try it first, then show the solutionSolution
  1. Demonetisation is the withdrawal of the legal tender status of a currency unit (a denomination of notes or coins) - 1 mark.
  2. The old notes cease to be valid for payments; they must be deposited or exchanged at banks within a time limit, and new notes are introduced - 1 mark.

Answer: Demonetisation is the act of withdrawing the legal tender status of a particular denomination of currency, so those notes can no longer be used in payment; people must deposit or exchange them at banks within a set period.

Demonetisation in India, 2016 (and earlier)

On 8 November 2016 the Government of India announced that ₹500 and ₹1,000 notes would cease to be legal tender from midnight. These two denominations made up the bulk of the value of currency in circulation. People could deposit or exchange the old notes at banks and post offices up to the end of December 2016, with limits on cash withdrawals for some weeks. New ₹500 and ₹2,000 notes were issued.

India had also demonetised high-value notes in 1946 and 1978, with the aim of tackling unaccounted money.

Worked example

(2 marks) Which notes were demonetised in India on 8 November 2016, and what replaced them?

Try it first, then show the solutionSolution
  1. The ₹500 and ₹1,000 notes then in circulation ceased to be legal tender - 1 mark.
  2. New ₹500 and ₹2,000 notes were introduced - 1 mark.

Answer: The old ₹500 and ₹1,000 notes were demonetised on 8 November 2016, and new ₹500 and ₹2,000 notes were introduced in their place.

Objectives of demonetisation

1. To curb black money: unaccounted income kept as cash to avoid tax would either have to be deposited in banks (and explained) or lose its value.
2. To eliminate counterfeit (fake) currency in circulation.
3. To stop the financing of terrorism and other illegal activities that rely on cash.
4. To promote a digital, less-cash economy: payments by cards, mobile wallets, UPI and net banking.
5. To widen the tax base and formalise the economy by bringing more transactions into the banking system.
6. To reduce corruption that depends on cash payments.

Worked example

(2 marks) State any two objectives of demonetisation.

Try it first, then show the solutionSolution
  1. To curb black money held in cash - 1 mark.
  2. To remove counterfeit currency (or to promote digital payments, stop terror financing) - 1 mark.

Answer: Two objectives were to curb black money hoarded as cash and to eliminate counterfeit currency notes (it also aimed to promote digital payments and stop terror financing).

Effects of demonetisation

Short-term effects:
1. Cash shortage: with most currency withdrawn, people faced long queues at banks and ATMs.
2. Hardship for the informal sector: daily-wage workers, small traders and farmers who deal mainly in cash were badly affected; sales and production slowed for some time.
3. Temporary slowdown in some economic activity.

Longer-term effects:
1. A sharp rise in digital payments, such as mobile wallets and UPI.
2. Large deposits flowed into banks, increasing their funds for lending.
3. More people filed income tax returns, widening the tax base.
4. Many transactions shifted from cash to the formal banking system.

There has been debate about how far it achieved its aim of removing black money, since most of the demonetised currency returned to banks.

Worked example

(2 marks) State two effects of demonetisation on the Indian economy.

Try it first, then show the solutionSolution
  1. Short term: a shortage of cash, causing long queues and hardship for cash-based workers and small traders - 1 mark.
  2. Longer term: a large rise in digital payments and bank deposits - 1 mark.

Answer: In the short term, a severe cash shortage caused queues and hurt cash-dependent workers and traders; in the longer term, digital payments and bank deposits rose sharply.

Withdrawal of ₹2,000 notes (2023) and how it differs

On 19 May 2023 the Reserve Bank of India announced that ₹2,000 notes would be withdrawn from circulation under its 'clean note policy' (keeping good-quality currency in circulation). People were asked to deposit or exchange them at banks within a given period.

The RBI stated that the ₹2,000 notes would continue to be legal tender. So, strictly, this was a withdrawal from circulation rather than a demonetisation, in which notes lose legal tender status. Questions may still describe it in terms of demonetisation; the safest answer explains what happened and notes this distinction.

Reasons given included that the ₹2,000 note had served its purpose of quickly replacing the currency withdrawn in 2016, that other denominations were now adequate, and the clean note policy.

Worked example

(2 marks) How did the 2023 withdrawal of ₹2,000 notes differ from the 2016 demonetisation?

Try it first, then show the solutionSolution
  1. In 2016 the old ₹500 and ₹1,000 notes lost their legal tender status overnight - 1 mark.
  2. In 2023 the ₹2,000 notes were withdrawn from circulation under the clean note policy but the RBI said they remained legal tender - 1 mark.

Answer: In 2016 the ₹500 and ₹1,000 notes ceased to be legal tender, while in 2023 the ₹2,000 notes were only withdrawn from circulation under the clean note policy and the RBI said they would continue to be legal tender.

Demonetisation in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Effect on the informal sector

Suppose a vegetable seller who accepts only cash finds that most of her customers suddenly have no valid small notes, and the bank queue to exchange old notes takes half a day.

Which effect of demonetisation does this show, and how might the seller adapt?

Try it first, then show the solutionSolution
  1. Withdrawal of most currency caused a cash shortage.
  2. Cash-based small traders lost sales: hardship for the informal sector.
  3. She could start accepting digital payments (for example UPI) to continue selling.

Answer: It shows the short-term cash crunch that hurt the informal sector. She could adapt by accepting digital payments, which is the kind of shift demonetisation aimed to encourage.

Memory hook: No cash, no sale, unless you go digital.

Black money

Imagine a trader has hidden a large sum of untaxed income as ₹1,000 notes at home when those notes are demonetised.

What choices does he face, and how is this meant to curb black money?

Try it first, then show the solutionSolution
  1. The notes are no longer legal tender, so he cannot spend them.
  2. He must deposit them in a bank, where large unexplained deposits can be checked by tax authorities.
  3. If he does not deposit them, the cash becomes worthless.

Answer: He must either deposit the notes in a bank, exposing the income to tax scrutiny, or lose their value. This is how demonetisation aims to bring black money into the open or destroy it.

Memory hook: Declare it or lose it.

Withdrawal versus demonetisation

Suppose a shopkeeper refuses a ₹2,000 note in June 2023, saying 'it has been demonetised'.

Was he right?

Try it first, then show the solutionSolution
  1. In May 2023 the RBI withdrew ₹2,000 notes from circulation under its clean note policy.
  2. The RBI said the notes continued to be legal tender.
  3. So they were not demonetised in the strict sense.

Answer: Not strictly. The ₹2,000 notes were being withdrawn from circulation but, according to the RBI, remained legal tender; they had not lost their legal tender status as in a demonetisation.

Memory hook: Withdrawn is not the same as invalid.

Topics in this chapter

Demonetisation: key facts

Demonetisation
Withdrawal of legal tender status of a currency unit
Old notes must be deposited or exchanged.
India 2016
8 November 2016: ₹500 and ₹1,000 notes; new ₹500 and ₹2,000 introduced
Earlier: 1946, 1978.
Objectives
Black money, fake notes, terror financing, digital economy, tax base
2023
₹2,000 notes withdrawn from circulation (clean note policy); stated to remain legal tender

How the board asks Demonetisation

The question patterns to expect, and the method that works for each.

Question typeHow it is askedMethod
Meaning (2 marks)What is demonetisation?Use 'legal tender status withdrawn'.
Stimulus-based (5 marks)A news item on the 2016 demonetisation or the 2023 withdrawal; meaning, objectives, effects.Define, give two or three objectives, and two effects; note the 2023 distinction where relevant.
MCQ (Section A)Which notes were demonetised in 2016? Which is not an objective?₹500 and ₹1,000; objectives include black money, fake notes, digital payments.

Tricks to remember Demonetisation

Short memory aids. Say each one aloud once, then use it on a question the same day.

  • B-F-T-D-T

    Black money, Fake notes, Terror funding, Digital payments, Tax base.

    Use it when: Objectives.

  • 8-11-16: 500 and 1,000 out

    8 November 2016 removed the ₹500 and ₹1,000 notes.

    Use it when: Date and notes.

Demonetisation: board-level solved questions

Ordered from board level to HOTS. Cover the solution, write your own, then compare step by step.

Example 1: Notes demonetised · 1 mark · MCQBoard level

Which notes were demonetised in India on 8 November 2016?
(a) ₹100 and ₹500
(b) ₹500 and ₹1,000
(c) ₹1,000 and ₹2,000
(d) ₹2,000 only

Try it first, then show the solutionSolution
  1. The old ₹500 and ₹1,000 notes lost legal tender status; ₹2,000 notes were introduced then.

Answer: (b) ₹500 and ₹1,000.

Example 2: Not an objective · 1 mark · MCQBoard level

Which of the following was NOT an objective of demonetisation?
(a) Curbing black money
(b) Removing counterfeit notes
(c) Increasing the use of cash
(d) Promoting digital payments

Try it first, then show the solutionSolution
  1. Demonetisation aimed to reduce reliance on cash, not increase it.

Answer: (c) Increasing the use of cash.

Example 3: Assertion and reason: legal tender · 1 mark · Assertion-reasonHarder board level

Assertion (A): After demonetisation, old notes cannot be used to make payments.
Reason (R): Demonetisation withdraws the legal tender status of the notes.
(a) Both A and R are true and R explains A
(b) Both A and R are true but R does not explain A
(c) A is true but R is false
(d) A is false but R is true

Try it first, then show the solutionSolution
  1. Demonetised notes are no longer valid for payments: A is true.
  2. That is because they lose legal tender status: R is true and explains A.

Answer: (a) Both A and R are true and R explains A.

Example 4: Meaning · 2 marks · Very short answerBoard level

What is meant by demonetisation?

Try it first, then show the solutionSolution
  1. Withdrawal of the legal tender status of a currency unit.
  2. Old notes must be deposited or exchanged within a set time; new currency is issued.

Answer: Demonetisation is the withdrawal of the legal tender status of a denomination of currency, so those notes stop being valid money and must be deposited or exchanged within a fixed period.

Example 5: Objectives and effects · 5 marks · Long answerHarder board level

Explain three objectives and two effects of the demonetisation of 2016.

Try it first, then show the solutionSolution
  1. Objective: curb black money held as cash.
  2. Objective: eliminate counterfeit notes.
  3. Objective: promote digital payments and widen the tax base.
  4. Effect: severe cash shortage and hardship for the informal sector.
  5. Effect: rise in digital payments and bank deposits.

Answer: Objectives: (1) to curb black money hoarded as cash, (2) to eliminate fake notes, and (3) to promote digital payments and widen the tax base. Effects: (1) a severe cash shortage that hurt daily-wage workers and small traders, and (2) a lasting rise in digital transactions and bank deposits.

Example 6: 2023 stimulus · 5 marks · Long answerHOTS / competency

Read: 'On 19 May 2023 the RBI announced the withdrawal of ₹2,000 notes from circulation under its clean note policy.' (a) Was this a demonetisation in the strict sense? Explain. (b) State two reasons a central bank might withdraw a note from circulation.

Try it first, then show the solutionSolution
  1. (a) Demonetisation means the note loses legal tender status.
  2. (a) The RBI said ₹2,000 notes would continue to be legal tender, so it was a withdrawal from circulation, not a strict demonetisation.
  3. (b) To keep clean, good-quality notes in circulation (clean note policy).
  4. (b) Because other denominations are adequate for public needs, and the high-value note had served its purpose after 2016.
  5. Conclusion: the public was asked to deposit or exchange the notes in banks.

Answer: (a) Not strictly. In a demonetisation notes lose legal tender status, but the RBI stated the ₹2,000 notes would remain legal tender while being withdrawn from circulation. (b) To follow its clean note policy, and because other denominations were adequate and the ₹2,000 note had served its purpose of replacing the currency withdrawn in 2016.

Example 7: Evaluate · 2 marks · Short answerHOTS / competency

'Demonetisation caused short-term pain for long-term gain.' Give one point for each part.

Try it first, then show the solutionSolution
  1. Short-term pain: a cash shortage that hit cash-based informal workers and traders.
  2. Possible long-term gain: growth of digital payments and a wider tax base (though its impact on black money is debated).

Answer: Short-term pain came from cash shortages and losses in the informal sector. Possible long-term gains include the growth of digital payments and a wider tax base, though how far it removed black money is debated.

Case-study practice (Section B style)

Read the situation, then answer every part. In the board paper this is a 10-mark question split into 2 + 2 + 3 + 3 marks.

Midnight announcement

Imagine a family hears on television at 8 p.m. that, from midnight, the ₹500 and ₹1,000 notes they hold will no longer be legal tender. The next morning there are long queues outside banks and ATMs. Weeks later, the local grocer has started accepting payment by mobile phone.

  1. (i) · 2 marks

    What is meant by 'no longer legal tender'?

    Answer

    Answer: The notes are no longer accepted by law as valid money for payments or settling debts; they must be deposited or exchanged at banks.

    1 mark for meaning, 1 for consequence.

  2. (ii) · 2 marks

    State two objectives behind this announcement.

    Answer

    Answer: To curb black money held in cash and to eliminate counterfeit notes (also promote digital payments, stop terror financing).

    1 mark each.

  3. (iii) · 3 marks

    Explain the effects shown in the passage and one other effect.

    Answer

    Answer: The queues show a severe cash shortage in the short term. The grocer's mobile payments show the shift to digital transactions. Another effect: large deposits in banks (or hardship for daily-wage workers, more tax returns).

    1 mark per effect.

  4. (iv) · 3 marks

    Distinguish demonetisation from the 2023 withdrawal of ₹2,000 notes.

    Answer

    Answer: In the 2016 demonetisation, notes lost legal tender status overnight. In 2023 the RBI withdrew ₹2,000 notes from circulation under its clean note policy, asking people to deposit or exchange them, but stated that they remained legal tender.

    1 mark for the 2016 position (legal tender withdrawn), 1 for the 2023 withdrawal under the clean note policy, 1 for stating that the ₹2,000 notes remained legal tender.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

What is demonetisation? (2 marks) (2 marks)

StepMarks
Withdrawal of legal tender status of a currency unit.1
Notes must be deposited/exchanged; new notes issued.1

Three objectives and two effects of demonetisation. (5 marks) (5 marks)

StepMarks
Objective 1.1
Objective 2.1
Objective 3.1
Effect 1.1
Effect 2.1

Where students lose marks in Demonetisation

The slips examiners see most often, and what to write instead.

  • Mistake: Defining demonetisation as 'banning notes' without legal tender

    Students use everyday language.

    Do this: Use the phrase 'withdrawal of legal tender status'.

    Usually costs: 1 mark.

  • Mistake: Wrong notes or date

    Students confuse the 2016 event with the 2023 ₹2,000 withdrawal.

    Do this: 2016: ₹500 and ₹1,000 demonetised; 2023: ₹2,000 withdrawn from circulation.

    Usually costs: 1 mark.

  • Mistake: Listing effects without saying short or long term

    Answers that mix effects lose clarity.

    Do this: Group effects: short-term (cash crunch, informal sector) and long-term (digital payments, deposits, tax base).

    Usually costs: 1 mark in long answers.

  • Mistake: Overstating results as facts

    Students claim demonetisation 'ended black money'.

    Do this: State aims and observed effects; note that its impact on black money is debated.

    Usually costs: 1 mark.

Practice questions on Demonetisation

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

  1. Q1 · 1 mark · MCQBoard level

    Demonetisation means:
    (a) printing new notes
    (b) withdrawing the legal tender status of a currency unit
    (c) devaluing the rupee against the dollar
    (d) increasing interest rates

    Hint

    Legal tender.

    Answer

    (b) withdrawing the legal tender status of a currency unit.

  2. Q2 · 1 mark · MCQHarder board level

    In which years before 2016 did India demonetise high-value notes?
    (a) 1950 and 1991
    (b) 1946 and 1978
    (c) 1969 and 1980
    (d) 1947 and 1966

    Hint

    Two earlier occasions.

    Answer

    (b) 1946 and 1978.

  3. Q3 · 2 marks · Very short answerHarder board level

    How was demonetisation expected to promote a digital economy?

    Hint

    Cash shortage.

    Answer

    With cash scarce, people and businesses turned to cards, mobile wallets and UPI for payments, and many continued using them, moving transactions into the formal digital system.

  4. Q4 · 2 marks · Very short answerHarder board level

    Give two reasons why the informal sector was hit hard by demonetisation.

    Hint

    Cash dependence.

    Answer

    (1) Informal workers and small traders deal almost entirely in cash, so the cash shortage stopped their business. (2) Many lacked bank accounts or digital payment access, so they could not switch quickly.

  5. Q5 · 2 marks · Very short answerBoard level

    What is meant by counterfeit currency, and how could demonetisation reduce it?

    Hint

    Fake notes.

    Answer

    Counterfeit currency is fake notes printed illegally. When a denomination is demonetised, all old notes, including fake ones, become invalid, and new notes with better security features are introduced.

  6. Q6 · 5 marks · Long answerHarder board level

    Explain the meaning, three objectives and two effects of demonetisation.

    Hint

    B-F-T-D-T.

    Answer

    Meaning: withdrawal of legal tender status of a denomination. Objectives: curb black money, remove fake notes, promote digital payments (also stop terror financing, widen tax base). Effects: short-term cash crunch hurting the informal sector; long-term growth of digital payments and bank deposits.

  7. Q7 · 2 marks · Very short answerHOTS / competency

    Why did most of the demonetised currency return to banks, and what did this suggest?

    Hint

    People deposited notes.

    Answer

    People deposited their old notes in banks rather than lose their value, so most of the currency came back. This suggested that much black money was not held as cash, or was converted into deposits, which raised debate about how far demonetisation met its main aim.

  8. Q8 · 2 marks · Very short answerHOTS / competency

    Link demonetisation to the legal definition of money.

    Hint

    Declared by law.

    Answer

    Legally, money is what the law declares to be legal tender. Demonetisation uses the same legal power in reverse: by withdrawing legal tender status, it turns certain notes from money into mere paper.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

  1. 1.When was the 2016 demonetisation announced?Show answer

    8 November 2016.

  2. 2.Which notes were demonetised then?Show answer

    ₹500 and ₹1,000.

  3. 3.Name two objectives of demonetisation.Show answer

    Curbing black money and removing counterfeit notes.

  4. 4.What policy was cited for the 2023 ₹2,000 withdrawal?Show answer

    The RBI's clean note policy.

  5. 5.Name one long-term effect of demonetisation.Show answer

    Growth of digital payments.

Best order to study it

  1. Meaning, linked to legal tender.
  2. India's 2016 demonetisation and earlier ones.
  3. Objectives.
  4. Short-term and long-term effects.
  5. The 2023 ₹2,000 withdrawal and the difference.

Quick revision checklist

The night before the exam: can you do each of these without looking?

  • Demonetisation = legal tender status withdrawn.
  • 8 November 2016: ₹500 and ₹1,000; new ₹500 and ₹2,000 issued; also 1946, 1978.
  • Aims: black money, fake notes, terror financing, digital economy, tax base.
  • Effects: cash crunch, informal sector hit; digital payments, deposits, tax returns rose.
  • 2023: ₹2,000 notes withdrawn under clean note policy; stated to remain legal tender.

Demonetisation: frequently asked questions

Is demonetisation the same as devaluation?

No. Demonetisation removes the legal tender status of certain notes; devaluation lowers the official exchange value of a currency against other currencies.

Were ₹2,000 notes demonetised in 2023?

The RBI withdrew them from circulation under its clean note policy and stated that they continued to be legal tender, so it was not a demonetisation in the strict sense.

How detailed should my answer be?

The syllabus asks for a brief understanding: meaning, the main objectives and the main effects, with the 2016 example.

Based on: CISCE ICSE 2027 Economics syllabus; CISCE ICSE 2025 Specimen Question Paper and Marking Scheme, Economics (641)