Business Principles, Tools, and Techniques in Participating in Various Types...
Money and supply of money
1. MONEY AND SUPPLY OF
MONEY
-By Priyanka ChhabraBy Priyanka Chhabra
2. BARTER SYSTEM
• It refers to system in which goods are exchanged for
goods
• It is also known as C-C economy
• Here C stands for commodity. Hence C-C economy is
the one in which commodities are exchanged for
commodities
• Barter system can work when there exists ‘Double
Coincidence of Wants’
By Priyanka Chhabra
6. Double Coincidence of wants refers to the
simultaneous fulfillment of mutual wants of buyers
and sellers
However it is difficult to find this in real life and
thereby leading to huge ‘Trading Cost’
By Priyanka Chhabra
7. LIMITATIONS OF BARTER SYSTEM
Lack of Double Coincidence of wants
Lack of common measure of value
Lack of standard of deferred payment
Lack of store of value
By Priyanka Chhabra
8. LACK OF COMMON MEASURE OF VALUE
All commodities are not of equal value and there is no common unit
of value of goods and services in which exchange ratio can be
expressed
By Priyanka Chhabra
10. LACK OF STANDARD OF DEFERRED
PAYMENT
• Contracts involving future
payment cannot takes place
• Repayment may leads to
conflict between parties
concerned
• The commodity to be repaid,
may lose or gain its value at the
time of repayment
By Priyanka Chhabra
11. LACK OF STORE OF VALUE
• It is difficult to store wealth as most of the goods do not
possess durability and their storage may require time and
efforts
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13. MONEY
Money is anything which is generally accepted as a medium of
exchange, measure of value, store of value and means for standard
of deferred payment
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14. MEDIUM OF EXCHANGE
• In order to avoid the problem of double coincidence of wants, money has been
introduced as a medium of exchange
• This made exchange process much simple
• This has changed the nature of production activity. Now production is less for self
consumption and more for market
• Size of the market has also increased which accelerates GDP growth
By Priyanka Chhabra
15. MEASURE OF VALUE
• It means that money works as a common denomination through which
value of all the goods and services are expressed
• It has facilitated comparison of market value of different commodities
• It facilitates calculation of exchange ratios, national income and
maintenance of business accounts
• Rupee is the unit of measurement in India
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16. STANDARD OF DEFERRED PAYMENT
• Payments which are made in the future are known as deferred payments
• It lead to the emergence of ‘financial market’- the market that deals in
borrowing and lending of money
• It lead to the creation of financial institution
• Availability of credit has lead to increase in consumption and investment
expenditure thereby promoting economic growth
By Priyanka Chhabra
17. STORE OF VALUE
• It implies store of wealth
• It is a source of future investment
• It provides security to people to
meet unpredictable emergencies
• It does not require much space
and has general acceptability
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18. STATIC AND DYNAMIC FUNCTION OF
MONEY
Facilitates
working of the
economy
As a medium of
exchange etc.
Static
function Causes
movement in the
level of economic
activity
Rise in price level
Rise in income,
output and
employment
Dynamic
function
By Priyanka Chhabra
19. FORMS OF MONEY
Legal tender
money
Optional
money
Near money Narrow money
Broad money
Full-bodied
money
Representative
money
Fiat money
Fiduciary
money
Credit money
By Priyanka Chhabra
20. 1. LEGAL TENDER MONEY
• Money which can be legally used to make payment of debts or
other obligations
• They are of two types
• Limited legal tender
• That can be paid up to a certain limit
• In India, coins are limited legal tender
• 50 paisa coins can be offered as legal tender for dues
up to ₹10 and smaller coins for dues up to ₹1.
• Unlimited legal tender
• That can be paid up to any amount
• Legal action can be taken against a person who refuses
to accept this money
• In India, paper notes are unlimited legal tender
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21. 2. OPTIONAL MONEY
• Also known as ‘Non-legal tender money’
• It refers to that form of money, which is generally accepted, but
legally, one is not bound to accept it
• Eg: Cheque, DD etc
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22. 3. NEAR MONEY
• It includes those financial assets which are not as liquid as coins and currency
notes, but can easily be converted into money for paying debts
• Eg: FDs, Bonds
• These are non-legal tender money
• They cannot be used directly but can be converted into cash within a short
span of time
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23. 4. NARROW MONEY
It includes only those things which function
as money like coins, currency notes and other
liquid assets.
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24. 5. BROAD MONEY
In addition to narrow money it also includes time deposits in
banks and post offices
Broad Money = Narrow money + near money
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26. 6 FULL-BODIED MONEY
• It refers to money in terms of coins whose
commodity value is equal to the money value
as and when these are issued
• In other words, any unit of money, whose
face value and intrinsic value are equal, is
known as full bodied money i.e. Money Value
= Commodity Value
• Face vale is the value written on the unit of
money. Eg: on 100 rupee note face value
written is 100 rupee
• Intrinsic value is the value of the metal
contained in the unit of money
By Priyanka Chhabra
27. 7. REPRESENTATIVE MONEY
• It refers to money which is usually made of paper
• The value of representative money is much higher than its value as a commodity
• Such type of paper money is 100% backed by gold reserves
• The Reserve bank of India has the authority to issue currency. The current system
of Indian government to issue notes is “Minimum Reserve System”. Under this
policy, the minimum reserves to be maintained in the form of gold and
foreign exchange should consists of rupees 200 crore.
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28. 8. FIAT MONEY
• It refers to that money which is issued by order / authority of the
government
• It includes notes and coins which the people in a country are legally bound
to accept as a medium of exchange
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29. 9. FIDUCIARY MONEY
• It is that money which is accepted as a medium of exchange because of the
trust between the payer and the payee
• Eg: cheque is fiduciary money as these are accepted as a means of
payment on the basis if trust, not on the basis of any order from the
government
By Priyanka Chhabra
31. 10. CREDIT MONEY
• It refers to money whose intrinsic value is much lower than its
face value i.e. Money Value > Commodity Value
• Forms of credit money are:
• Token coins
• Representative token coins
• Promissory notes issued by central bank
• Demand deposit in bank
By Priyanka Chhabra
32. The monetary system prevailing in India at present is managed and controlled by the
Reserve Bank India. The present monetary system is based on inconvertible paper
currency, supplemented by coins. On the external front Indian currency ‘rupee’ is again
convertible to various other currencies of the world.
The RBI has the authority to print and issue currency notes of different denominations
right from two rupee notes to ten-thousand rupee notes. A separate Issue Department
of the RBI looks after the issue of currency.
At present the Issue Department is maintaining minimum reserve system where it
maintains a minimum reserve of gold and foreign securities to the extent of Rs. 200 crore
of which the gold reserve should be of minimum value not less than Rs. 115 crore.
The present currency note is an inconvertible paper note and the same cannot be issued
by the RBI in unlimited amount. There is a limit to the power of Issue Department of RBI
to issue paper currency. The entire issue of currency note is subjected to the regulations
framed in the RBI Act of 1935
MONETARY SYSTEM IN INDIA
By Priyanka Chhabra
33. DEMAND FOR MONEY
Transaction
Motive
• For conducting
day to day
transactions
• Income is not
continuous
• Expenditure is
continuous
• Positively
associated with
the level of
income
Precautionary
Motive
• For unforeseen
contingencies
• Like sickness,
accident etc.
• Positively
associated with
the level of
income
Speculative
Motive
• Alternative to
financial assets
like bonds
• Depends upon
expectations
• Negatively
related to RoI
By Priyanka Chhabra
34. SUPPLY OF MONEY
• 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 money creating sector
• Banks
• Government
• In other words, supply of money refers to the stock of money
held by those who demand money and not by those who supply
money
By Priyanka Chhabra
35. MEASUREMENT OF MONEY SUPPLY
• Till 1967-68, the Reserve Bank of India (RBI) used to adopt only
the narrow measure of money supply, defined as the sum of
currency and demand deposits, both held by the public.
• From April 1977, the RBI has adopted four alternative measures
of money supply, labeled as Ml, M2, M3 and M4
• The Reserve Bank of India has adopted four measures of money
stock in a descending order of liquidity criteria as follows
• Ml
• M2
• M3
• M4
By Priyanka Chhabra
36. M1
The Ml measure consists of
a) Currency notes and coins with the public
b) Demand deposits with all commercial and co-operative banks (inter
bank deposits are excluded).
c) Other deposits held with the Reserve Bank of India
a) On behalf of foreign bank and government
b) Of public financial institutions like NABARD
c) Of World Bank and IMF etc.
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37. • M1 is also known as ‘Transaction Money’ as it can directly be
used for making transactions
• It is the most liquid measure of money supply as all its
components are easily used as a medium of exchange
• Currency money is also termed as ‘Fiat Money’
• It is also termed as ‘Legal Tender Money’
• Only net Demand Deposits are included i.e. inter bank
transactions are excluded. These are the deposits held by banks
on behalf of the other banks. These deposits do not belong to
public.
By Priyanka Chhabra
38. M2
The M2 measure consists of
a) Ml
b) Saving deposits with post office saving banks. The category
M2 is prescribed as a compromise between the need for
conceptual neatness and operational feasibility. This is on
account of the fact that post office saving bank deposits are
relatively less liquid than demand deposits with bank, but
more liquid than time deposits
By Priyanka Chhabra
39. M3
The M3 measure consists of
a) Ml
b) Time deposits of all commercial and co-operative banks
(inter bank time deposits are excluded).
The category M3 represents aggregate monetary resources
(AMR) as has been conceived by the working group of the RBI
on the concept of money
By Priyanka Chhabra
40. M4
The M4 measure consists of
a) M3
b) Total deposits with the post office saving organization
(National Saving Certificates are excluded)
By Priyanka Chhabra
41. It is also known as High-Powered Money,
monetary base, base money etc.
M0 = Currency held by the public + Cash
reserves with the bank
It is the monetary base of economy as it helps
in money creation
M0
By Priyanka Chhabra
42. • Ml and M3 are the most important from the point of view of
policy formation.
• M2 and M4 are not used by the RBI for policy formation
because the post office saving bank deposits and total
deposits with the post office do not come under the range of
RBI
• M1 being most liquid and M4 being least liquid
• M3 is also known as Aggregate monetary resource of the
society
• M1 and M2 are known as narrow money while M3 and M4
are known as broad money
IMP POINTS
By Priyanka Chhabra
