EMERGENCE OF MONEY
Exchange of goods for goods is called barter system.
Barter system suffered from many drawbacks, such as :
Lack of double coincidence of wants
Lack of common measure of value
Lack of divisibility
Difficulty in storing wealth
Difficulty in borrowing and lending
According to G. Crowther, “ Money is anything that is generally accepted as a
medium of exchange and at the same time acts as a measures and as a store of
Kinds of money:
Private bank money
Medium of exchange Measurement of value
Store of value
Transfer of value
Standard of deferred payment
Distribution of national income
Basis of credit and credit creation
Guarantee of solvency
Maximization of satisfaction
Bearer of option
Keynesian theory of demand for money
Keynesian theory of the demand for money was first formulated by Keynes in his well-known
book, The Genera’ Theory of Employment, Interest and Money (1936). It has developed
further by other economists of Keynesian persuasion. Keynes stated that people’s demand
for money does not mean the actual cash balances people hold , but the amount of cash
balances they WANT TO HOLD” .In understanding Keynes’ theory two questions need to
One is why money is demanded?
Other is what are the key determinants of demand for money?
Demand for money
Money is the most liquid form of asset. The demand for money refers to the
total money demanded by the people in the form of cash for various
purposes. According to Keynes, This theory is also known as
The demand for money arises because of the following three motivates:
Holding cash to meet daily needs is called Transaction motive the need
for holding cash arises because there exist a time-gap between receipt of
income and the consumption expenditure.
Usually, people receive income at certain intervals of time such as a week,
a month, etc,. which is to be consumed throughout the period till the
This demand for money is a positive function of income.
The demand for money to meet this unforeseen and unexpected
expenses in known as precautionary demand for money.
Like the transaction demand for money, precautionary demand for money
is also a positive function of money.
Emand for money
The speculative demand for money refers to the demand for the money that
people hold as idle cash balance to speculate with the aim of earning capital
gains and profits.
Keynes demonstrated that there is a inverse relationship between the rate of
interest and speculative demand for money.
Keyne’s theory of demand for money
Cash needed to
Cash needed to
Hold of cash to
Time gap between
future receipts and
rate of interest
Mt is income
Mp is income
Ms is income
Graphical representation of keyne’s theory
Total demand for money = Mt + Mp + Ms
Mt = f(y), as income increases, demand transaction motive increases
Mp = f(y), as income increases, demand for precautionary motive
Ms = f(i), as interest rates increases, demand for speculative motive
decreases and vice-versa.
The concept of liquidity trap was also an outcome of Keynes's thought. It is
an unfavorable conditions of an economy in which the monetary authority
cannot do anything. As mentioned above speculative motive of demand for
money is depending on the market rate of interest. At a lower rate of interest
the bond price will raise. So, People demand money increases. But in an
unfavorable economic condition a sharp reduction in the Interest rates will
lead to a trap which is popularly called by economist’s the “liquidity trap”.
This can be shown in the .following figure:
Supply of money
Supply of money refers to aggregate stock of money i.e.,. Currency notes and coins
held by the people in the country at a particular point of time.
The monetary authority of an economy undertakes the task of issuing currency notes
In India the monetary authority and RBI together forms the monetary authority.
Currency notes are issued by RBI and coins are issued by monetary authority. They
together known as High Power Money.
The stock of money has the following two major components:
The currency component
The deposit component
Importance of money supply
Money supply plays a crucial role in the determination of
price level and interest level.
Growth of money supply helps in acceleration of economic
development and price stability
There must be a controlled expansion of money supply i.e.,
no inflation or deflation in the economy.
The supply of money depends on monetary base and reserve
ratio, But not on the interest rate, so the supply of money is
Measures of money
Since, April 1977, RBI has adopted four concepts of money
supply . i. e, M1,M2,M3,M4.
M1 : It includes with money public, demand deposits and other
deposits with RBI. It is termed as narrow money. It is measured
C= Represents currency with public
DD= Represents demand deposits with
OD= Represents other deposits with RBI
M2: It includes all the components of M1 and savings deposits with the post office.
It is measured as follows:
M2 = M1 + POSBD
POSBD= Represents post office savings bank deposits.
M3: It includes all the components of M1 along with the time deposits of all banks.
It is “ Broad money” concept. It is measured as follows:
M3 = M1 + TD
TD = Represents Time deposits with all banks.
M4: It includes all the components of M3 and total deposits with post office
savings deposits( excluding National Savings Certificates) . It is measured as
M4 = M3 + TOPD
TOPD = Represents total post office deposits (excluding NSCs)
Liquidity and ranking
NAME TYPE LIQUIDITY
M1 Narrow money Highest
M2 Narrow money Less than M1
M3 Broad money Less than M2
M4 Broad money Lowest Liquidity
New measures of money supply
Initially for the last quarter of 20th century, RBI used to calculate money
supply and monetary aggregates in four forms namely, M1, M2, M3, M4. But
thereafter, RBI working group on money supply has modified the parameters
of measuring money supply. Thus, at present there exists only three monetary
aggregates. i.e., NM1, NM2, NM3.
NM1=currency with the public + demand deposits with the banking system +
other deposits with the RBI.
NM2= NM1 + Short term time deposits of residents (including and up to the
contractual maturity of the year)
NM3= NM2 + long term deposits f residents + call/ term funding from financial
Narrow money refers to coins and currency notes with public, demand drafts
with bank and other deposits with RBI. It is represented in M1 or NM1. The
money which is fully liquid and available whenever people need is called
The narrow definition of money can be represented as:
Narrow money = C + DD + OD
C= Represents narrow definition of money
DD= Represents currency held by the public
OD= Represents other deposits with RBI
Broad money refers to the money that is held in the form of savings and Net
Time Deposits besides the currency and demand deposits. It is the money
which is represented by M3 or NM3. IT includes both full liquid and less
The broad money can be represented as:
Broad money= C + DD + SD + TD
C= Represents currency held by the public
DD= Represents demand deposits held by the commercial banks
SD= Represents saving deposits of the public held with post office
TD= Represents Time deposits with the commercial banks.
Offenbar haben Sie einen Ad-Blocker installiert. Wenn Sie SlideShare auf die Whitelist für Ihren Werbeblocker setzen, helfen Sie unserer Gemeinschaft von Inhaltserstellern.
Sie hassen Werbung?
Wir haben unsere Datenschutzbestimmungen aktualisiert.
Wir haben unsere Datenschutzbestimmungen aktualisiert, um den neuen globalen Regeln zum Thema Datenschutzbestimmungen gerecht zu werden und dir einen Einblick in die begrenzten Möglichkeiten zu geben, wie wir deine Daten nutzen.
Die Einzelheiten findest du unten. Indem du sie akzeptierst, erklärst du dich mit den aktualisierten Datenschutzbestimmungen einverstanden.