2nd unit of macroeconomics full explination

1. IMRAN KHAN
IMRAN SIR SUCCESS POINT
WWW.IMRANSIRSUCCESSPOINT.IN
https://imransirsuccesspoint.teachmint.in

2.  It is the most important discovery of modern times.
 The word Money is derived from the Latin word “Monet”. MONETARY= मुद्रा.
 The origin of money is Lost.
 A thing which is commonly accepted as a medium of exchange is called money.
For example:- A rupee in India is money, as it is a commonly accepted medium of
exchange here like wise a dollar in USA is money as it is a commonly accepted
medium of exchange here.
 or
 Money is any thing which is generally acceptable as a medium of exchange,
measures of value, store of value and means for standard of deferred payment.
 In olden days goods were exchanged for goods. There was no money. Thus a
cobbler would make shoes in return for wheat from the farmer. A farm worker
would get grains as a reward for his labour and so on. This system of exchange was
known as Barter System.
 The term money is used to cover all such things like coins, currency notes, cheques
etc. which are used to conduct business transactions and settlement of business
claims.

3.  Barter system of exchange is a system in which goods are exchanged for goods.
 If you have surplus production of rice , your are to look for a person who need rice,
and at the same time has cloth which you need for yourself.
 It means double coincidence संयोग , इत्तफाक of wants, your want for cloth must
coincide with somebody’s want for rice and you must have surplus rice and
somebody’s want for surplus of cloth.
 With rise in economic activities the exchange through barter became more difficult
and complicated.
 Following are the principal drawbacks of barter system of exchange.
 Limitations of Money/ Drawbacks of money:-
 (1) Lack of double coincidence of wants:- (a) Double coincidence of wants is a
core characteristic of the barter system of exchange.
 (b) Double coincidence of wants implies that the two individuals are in possession
सम्पत्ति of such goods which they are willing to exchange for the satisfaction of their
wants.
 (c) With the emergence of money the problem of double coincidence of wants has
vanished गायब हो गई.

4.  Lack of common measure of value:- (a) In the barter system all commodities are
not of equal value and there is no common measure of value of goods and services
in which exchanged ratio can be expressed.
 For example:- If A has wheat and B has rice, then it is difficult to decide how much
wheat is needed to exchange with one kg of rice.
 In the absence of common measure the exchange ratio is fixed randomly, in which
one of the party is generally suffer.
 Evolution of money has given us a common measure of value and therefore a
system of accounting.
 Lack of standard or Deferred Payment:- (a) These days you hire a worker and
strike a contract to pay him Rs. 10,000 p.m. . What do you do in a barter system?
 (b) Would you decide to pay him in term of tables or chairs, in terms of rice or
wheat, in term of drugs or chocolates?
 (c) Contractual payments अनुबंत्तित भुगतान or future payments would certainly be very
difficult under barter system of exchange.
 (d) Evolution of money has facilitated contractual payments.

5.  Lack of store of value:- Under barter system it is difficult for people to store
wealth for future use because.
 (a) Most of the goods (Like wheat, rice , vegetables etc.) do not possess durability
their quality deteriorates with passage of time.
 (b) Storage of goods require time and efforts.
 (c) As a result goods cannot be used to store the earnings for a long period.

7.  Commodity Money:-Money is in fact discovered to remove Difficulties of barter. In fact
money has evolved in response to the urgent needs of the various stages of economic growth.
In the beginning of civilization goats, animal-hides, axe-heads, knives, arrows, slaves etc.,
have been used as money in different
 Perform the basic functions of money. It was difficult to borrow and lend and it was more
difficult to measure and store the value of goods and services. Further the volume of trade
remained very limited due problem of transportation of commodity money.
 Metallic Money:- With progress of human civilization commodity money changed into
metallic money. Metals like gold, Silver, copper, etc. were used as they could be easily
handled and their quantity can be easily ascertained पता लगाया. It was the main form of money
throughout the major portion of recorded history.
 Money made of metal is called metallic money.
 In the beginning full bodied coins of gold and silver were introduced but latter on these were
replaced with token coins. Now a day’s different alloy are being used for minting of coins.
 The metallic coins have a specific weight and shape. Coins are only used for smaller retail
payments because it is difficult to count, transport and store them.

8.  Paper Money:-It was found inconvenient as well as dangerous to carry gold and
silver coins form one place to another. So invention of paper money marked a very
important stage in the development of money.
 Paper money is controlled and regulated Central bank of the country (RBI in India).
 Credit Money:-In the present day modern economies or bank money is used for
making personal business payments.
 In the developed countries, transactions are taking place with the help of deposits
or checking accounts with paper money.
 Demand deposits or money sited in current accounts are easily convertible cash,
therefore they are convenient and safe.

9.  Plastic Money:-The latest type of money is plastic money in the form of credit
cards and debit cards. They aim at removing the need for carying cash to make
transaction.
 Crypto Currency:- A crypto currency, crypto-currency, or crypto is a digital
asset designed to work as a medium of exchange wherein individual coin
ownership records are stored in a ledger existing in a form of a
computerized database using strong cryptography to secure transaction records, to
control the creation of additional coins, and to verify the transfer of coin ownership.
It typically does not exist in physical form (like paper money) and is typically not
issued by a central authority.

10.  Primary Function:-

11.  1. Primary Functions:-Primary Functions include the most important functions of
money, which it must perform in every country,
 Medium of Exchange:
 Money, as a medium of exchange, means that it can be used to make payments for
all transactions of goods and services.
 It is the most essential function of money.
 Money has the quality of general acceptability So, all exchanges take place in terms
of money.
 1. This function has removed the major difficulty of lack of double coincidence of
wants and inconveniences associated with the barter system.
 2. Use of money allows purchase and sale to be conducted independently of one
another.
 3. This function of money facilitates trade and helps in conducting transactions in
an economy.
 4. Money has no power to satisfy human wants, but it commands power to
purchase those things, which have utility to satisfy human wants.


12.  (ii) Measure of Value (Unit of Value):
 Money as measure of value means that money works as a common denomination
संप्रदाय, in which values of all goods and services are expressed.
 1. By reducing the value of all goods and services to a single unit (i.e. price), it
becomes very easy to find out the exchange ratios between them and comparing
their prices.
 2. This function facilitates maintenance of business accounts, which would be
otherwise impossible.
 3. Money helps in calculating relative prices of goods and services. Due to this
reason, it is regarded as a Unit of Account’. For instance, ‘Rupee’ is the unit of
account in India, ‘Pound’ in England and so on.
 2. Secondary Functions:
 These refer to those functions of money which are supplementary to the primary
functions.
 These functions are derived from primary functions and, therefore, they are also
known as ‘Derivative Functions’.

13.  The major secondary functions are:
 (i) Standard of Deferred Payments:
 Money as a standard of deferred payments means that money acts as a ‘standard’
for payments, which are to be made in future. Every day, millions of transactions
take place in which payments are not made immediately. Money encourages such
transactions and helps in capital formation and economic development of the
economy.
 This function of money is significant because:
 1. Money as a standard of deferred payments has simplified the borrowing and
lending operations.
 2. It has led to the creation of financial institutions.
 (ii) Store of Value (Asset Function of Money):
 Money as a store of value means that money can be used to transfer purchasing
power from present to future.
 Money is a way to store wealth.
 Although wealth can be stored in other forms also, but money is the most
economical and convenient way.

14.  It provides security to individuals to meet contingencies, unpredictable emergencies
and to pay future debts. Under barter system, it was difficult to use goods as a store
of wealth due to perishable nature of some goods and high cost of storage.
 Money as store of value has the following advantages:
 1. Money is available in fractional denomination, ranging from Rs. 1 to Rs. 1,000.
 2. Money is easily portable. So, it is easy and economical to store money as its
storage does not require much space.
 3. Money has the merit of general acceptability so; it can be easily exchanged for
goods at all times.
 4. Savings in terms of money are much more secured than in terms of goods.
 Money is demanded for three motives:
 (a) Transaction Motive; लेन-देन का मकसद
 (b) Precautionary Motive; एहतियािी मकसद
 (c) Speculative Motive. सट्टा मकसद

15.  Money can be classified on the basis of relationship between the value of money as
money and the value of money as a commodity.
 Broadly, money can be classified as:
 (i) Full Bodied money (ii) Representative Full bodied money
 (iii) Credit money.
 (i) Full bodied Money:-Any unit of money, whose face value and intrinsic मूलभूि
value are equal, is known as full bodied money, i.e. Money Value = Commodity
Value. For example, during the British period, one rupee coin was made of silver
and its value as money was same as its value as a commodity.
 ii) Representative Full-bodied Money:
 It refers to money which is usually made of paper. The value of representative full-
bodied money is much higher than its value as a commodity. It is accepted as
money as it can be conveniently used for carrying out transactions.
 Such a type of paper money is 100% backed by metallic reserve of gold or silver
and is redeemable छ
ु डा सकने योग्य at the option of the holder. For example, in
case of convertible paper receipts, a person can exchange the amount
stipulated तनर्ाारिि on the paper receipt for equal value of gold.

16.  Two Kinds of Representative Money:
 A. Convertible Paper Money:
 It refers to the currency notes which are freely convertible into full-bodied money
(gold or silver) at any time at the option of the holder. However, 100% backing of
gold or silver is not desired as all the notes in circulation are not simultaneously
presented for conversion.
 B. Inconvertible Paper Money:
 It is that kind of paper money which cannot be convertible into full-bodied money
at the option of the holder. However, it circulates and commands value as its issue
is regulated by a responsible government.
 (iii) Credit Money:-Credit money refers to the money whose intrinsic value (as a
commodity) is much lower than its face value, i.e. Money Value > Commodity
Value. For example, face value of Rs 100 note is Rs 100, but we would get a much
lower value if we sell the note as a piece of paper. Credit cards, bank deposits are
other examples of credit money.

17.  The various forms of credit money are:
 (a) Token coins:
 These refer to small coins of various denominations, which are issued to facilitate
day-to-day requirements of the people. All Indian coins, like those of Rs 10, 5, 2 or
1, are token coins since their value as money is more than value of metal contained
in them.
 (b) Representative Token money:
 It is 100% backed and is fully redeemable in some commodity such as gold or
silver. It is generally in the form of paper and market value of what is actually
offered is less than value printed on paper notes.
 (c) Circulating promissory notes issued by central bank:
 These are currency notes issued by Reserve Bank in India. These include all
currency notes of denominations like Rs 1,000, Rs 500, Rs 100, etc. Each
promissory note contains the words, “I promise to pay the bearer the sum of
Rs…………. “, and is signed by the Governor of India. The commodity value of a
promissory note is much less than its money value.

18.  Some of the contingent functions of money in economics are as follows:
 (i) Distribution of National Income
 (ii) Maximization of Satisfaction
 (iii) Basis of Credit Creation
 (iv) Productivity of Capital
 (v) Bearer of Options and
 (vi) Guarantee of Solvency.
 (i) Distribution of National Income:
 Money helps in optimum distribution of national income among different factors of
production (land, labor, capital and enterprise).
 Total output of the country is jointly produced by these factors. So, the output
should be distributed among them.
 Money helps in distribution of the national product in the form of rent, wage,
interest and profit, which are expressed in money terms.

19.  (ii) Maximization of Satisfaction:
 Money helps the consumers and producers in maximizing their satisfaction.
 A consumer derives maximum satisfaction by equating the price (expressed in
terms of money) of each commodity with its marginal utility (satisfaction).
Similarly, a producer maximises his satisfaction (profit) by equating the marginal
productivity of a factor with price of such factor.
 (iii) Basis of Credit Creation:
 Credit creation by commercial banks was not possible until money was introduced.
Money as a store of value has encouraged savings by people in the form of demand
deposits in banks. Such demand deposits are used by the commercial banks to
create credit. ‘
 (iv) Productivity of Capital:
 Money increases the productivity of capital as it is the most liquid asset and can be
put to any use. Due to liquidity of money, capital can be easily transferred from less
productive uses to more productive uses.

20.  (v) Bearer of Options:
 Money provides purchasing power in the hands of the person (bearer) holding it
and he has numerous options for its use. The bearer can change his decision
regarding use of money from time-to-time and place-to- place depending upon
urgency, intensity and his priority.
 (vi) Guarantee of Solvency:
 Money serves as a guarantee of solvency for an individual or institution. If an
individual has enough money (more than his liabilities), then he cannot be declared
insolvent or bankrupt. Due to this reason, individuals and firms keep large amount
of money to meet unexpected needs.

21.  It refers to total volume of money held by public at a particular point of time in an
economy.
 It is a stock concept.
 It does not include:-
 1. Stock of money held by the government.
 2. Stock of money held by banking system in a country.
 Government and banking system of a country are supplier of money and the stock
of money held by the supplier of money is never treated as a part of the supply of
money in the country.
 Component of Money supply:-
 1. Currency with public:-
 2. Demand deposit with banks

22.  In India there are four alternative measures of money supply.
 Popularly Known as M1, M2, M3, M4.
 1. M1:- It is the first and basic measure of money supply.
 M1=Currency and coins with public + demand deposit with commercial bank
 + other deposit with RBI
 Other Deposit with RBI:
 Demand Deposit with reserve bank of Public Financial institution.
 Demand deposit with Reserve Bank of Foreign Central bank and Government.
 Demand Deposit of international financial Institution like IMF and World
Bank.
 M2=M1+Saving deposit with post office saving bank
 M3= M1+ Net time deposit with Bank
 M4= M3+ Total deposit with post office saving Bank (Excluding NSC)

23.  Important fact about measures of Money supply:-
 1. M1 is being most liquid and M4 is least liquid.
 2. M3 is widely used to measure money supply
 3. M1 and M2 are generally known as narrow money supply
 4. M3 and M4 are known as broad money supply.
 High Powered Money H:-It is a money produced by the RBI and the government.
It consist of two thing :-
 1. Currency held by the public
 2. Cash reserve with Bank.
 Money ‘M’ VS. High Powered Money ‘H’:-
 Money consist of currency and demand deposit while high powered money consist
of currency and cash reserve with bank.

24.  Definition of Money:-
 (A) Legal Definition of Money (B) Functional Definition of Money
 (C) Definition on the Basis of Liquidity (D) Definition on the Basis of Scope
 (A) Legal Definition of Money:
 According to this definition, money is what the law says is money. So, anything
which the government declares as money is money.
 On the basis of legal recognition, money is of two kinds:
 (i) Legal Tender Money:
 Money which can be legally used to make payment of debts or other obligations is
termed as legal tender money. A creditor is obliged by law to receive such money in
payment of debt due to him.
 Legal tender money is of two kinds:
 (a) Limited Legal Tender:
 It refers to that form of legal tender money, which can be paid in discharge of a
debt up to a certain limit. Beyond this limit, a person may refuse to accept the
payment and no legal action can be taken against him. In India, coins are limited
legal tender.

25.  (b) Unlimited Legal Tender:
 It refers to that form of legal tender money, which can be paid in discharge of a
debt of any amount. Legal action can be taken against a person who refuses to
accept this money. In India, paper notes are unlimited legal tender.
 (ii) Non-Legal Tender Money or Optional Money:
 It refers to that form of money, which is generally accepted, but legally, one is not
bound to accept it. For example, cheques, bank drafts, bills of exchange, etc. do not
have legal backing and their acceptance is totally optional.
 (B) Functional Definition of Money:
 According to this definition, money refers to anything that performs the four basic
functions of money:
 (a) Medium of exchange; (b) Measure of value;
 (c) Standard of deferred payments; (d) Store of value.

26.  (C) Definition on the Basis of Liquidity:
 On the basis of liquidity, money can be classified as:
 (i) Money or Liquid form of Money:
 Money has the quality of general acceptability which makes it the most liquid asset.
By liquidity, we mean the speed and certainty with which an asset can be converted
back into money. Coins, currency notes and bank money are the most liquid form
of money.
 (ii) Near Money:
 It includes those financial assets, which are not as liquid as coins and currency
notes, but can be easily converted into money for paying debts. For example,
National saving deposits, fixed deposit receipts, bonds, etc. They are as good as
money, but are non-legal tender money. Near money cannot be used directly for
purchase of goods and services. But, it can be converted into cash within a short
span of time.

27.  (D) Definition on the Basis of Scope:
 According to the scope of money, it has been defined in two ways:
 (i) Narrow Definition of Money:
 It includes only those things which function as money. It includes currency notes,
coins and demand deposits of banks as they perform the following functions of
money: (a) Medium of exchange, (b) Measure of value, (c) Standard of deferred
payments, (d) Store of value.
 (ii) Broad Definition of Money:
 In addition to narrow money, it also includes time deposits in banks and post
offices. Time deposits are included as they have high degree of moneyless and can
be converted into chequeable deposits within a short span of time. Broad Definition
of Money = Money Assets + Near Money.