Monetary Economics

Lecture 2
Lets get started!!

Introduction - functions of
money
 What is money?
• Anything that is generally acceptable as a
means of payment
• For settling all transactions (including
debt)
• Costless and convenient
 Functions of money
Functions of money
 Medium of exchange/payments
• barter – double coincidence of wants, low allocation efficiency,
gains from specialization
• Perfectly liquid
 Unit of account
 Standard of measure of value eg. NI, prices,
 Establishes exchange ratios (or relative prices)
 Makes comparisons possible
 However, its not perfect – varies overtime
 Standard of deferred payments
 Explain deferred payments
 Again, it varies in value
 Store of value
 Public can store wealth in the form of money
 Derived from MOE function – barter and dual transactions
 There are other assets that compete with money as store of
value, but money is the only one that is perfectly liquid
 Terminology
• Full bodied vs. token money (coins)
• Currency notes (no intrinsic value) – I promise…
• (earlier were bought back against full bodied silver rupees)
• (now, just other notes/coins)
 Terminology
• Deposit money – chequeable demand deposits
– Elaborate on deposits ( a bit on banking)

– Transfer of owneership of deposits precedes MOE function

• Same branch transfers and clearing houses

– Economise on cash

• Fiduciary (credit) money – money that circulates on the basis of

trust of its issuers (cheques)

– Public confidence
 Terminology
• Legal tender or fiat money

– coins and currency notes are legal tender as they serve on the fiat of the

government (sometimes RBI, on behalf of the government)

– Cannot be refused in payment settlement

– Coins are limited legal tender (cannot be accepted for payments beyond

a certain amount)
 Thanks!
• References
– Handa’s book
– S B Gupta – ‘Monetary Economics – Institutions,
Theory and Policy’ Chapter 1 Pages 1-9
– ‘The history of money’ – Niall Ferguson
documentary - https://www.youtube.com/watch?
v=84h_8-UlUQA
• Discussion on electoral bonds, black money,
demonetization
– http://epaper.livemint.com/epaper/viewer.aspx -
editorial