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FORMS OF MONEY:

•Fait Money;

•Fiduciary Money;

•Full Bodied Money;

•Credit Money.
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Fait Money:
Money which is issued by order or authority.
Example:
Currencies and coins at all denomination issued by
the central authority of every country, in India RBI
is the authority issues the currency.

Fiduciary Money:
Money backed up by trust between the payer and
payee. Examples :
•Cheques;
•Demand Deposits;
•Mortgages.
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Full Bodied Money:
Money whose intrinsic value is equal to face value.
Example:
Postal Coins or Gold Coins.
Intrinsic value = Face value

Credit Money:
Money whose claim is falling due in near future.
Examples :
•Cheques;
•Credit cards;
•Mortgages ;
•Drafts.
Face value > Intrinsic value
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Intrinsic value:
Intrinsic value is equal to face value - Engraving
the currency.

Face value:
Face value, is also called as nominal value of a coin,
stamp or paper money, as printed on it by the issuing
authority.

Legal value:
Value on the order of the authority.
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SUPPLY OF MONEY:

Money Supply:
It is the total stock of all the forms of
money (paper money, coins and demand
deposits of banks) which are held by the public
at any particular point of time. Sources of
money supply are:
1.Government (which issues one rupee
notes and all other coins)
2.RBI (currency issue)
3.Demand deposits in commercial banks
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Measures of Money Supply:

•Traditional or Narrow Approach

Ready to use at the moment

•Modern or Broader Approach

All means of money
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RBI Measures of Money Supply in
India

• M1 - the most commonly used measure of money supply

because its component is regarded as most liquid assets.
M1 = C + DD + OD
• C - denotes currency held by public;
• DD - stands for demand deposits in banks;
• OD - stands for other deposits with RBI.

• M2 - M1 + Savings deposits with Post Office Saving Banks

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RBI Measures of Money Supply in
India
• M3 - M1 + Time-deposits with Commercial Banks

• M4 - M3 + total deposits with Post Office Savings

Or
• M4 - M1 + total deposits with Post Office Savings + Time-
deposits with Commercial Banks
Or
• M4 - M1 and M2 are known as narrow money whereas M3
and M4 are known as broad money
Or
• M4 - M2 + M3 - M1
Meaning of Monetary Policy:
Monetary policy is concerned with
the changes in the supply of money and
credit.
It refers to the policy measures
undertaken by the government or the
central bank to influence the
availability.

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Objectives of Monetary Policy:
Stabilizing the Business Cycle:
Reasonable Price Stability:
Faster Economic Growth:
Exchange Rate Stability:

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Role of Monetary Policy in Developing Economies:
Developmental Role:
Creation and Expansion of Financial Institutions:
Effective Central Banking:
Integration of Organized and Unorganized Money Market:
Developing Banking Habits:
Monetization of Economy:
Integrated Interest Rate Structure:
Debt Management:
Maintaining Equilibrium in Balance of Payments:
Controlling Inflationary Pressures:
Long-Term Loans for Industrial Development:
Reforming Rural Credit System:

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Bank Rate Policy:
The bank rate policy is the traditional method of credit
control used by a central bank.
The bank rate or the discount rate is the rate at which a
central bank is prepared to discount the first class bills of
exchange.
The bank rate is distinct from the market interest rate. The
bank rate is the rate of discount of the central bank, while the
market interest rate is the lending rate charged in the money
market by the ordinary financial institutions.
There is a direct relationship between the bank rate and the
market interest rates. A change in the bank rate leads to change in
other interest rates prevailing in the market. In this sense, bank
rate is the effective rate for lending or borrowing which prevails in
the market. Slide - 13
Methods of Credit Control:
 Quantitative or General Methods:
•Bank Rate,
•Open Market Operations, And
•Cash-Reserve Ratio.
Qualitative or Selective Methods:
•Marginal Requirements,
•Regulation Of Consumer Credit,
•Control through Directives,
•Credit Rationing,
•Moral Suasion and Publicity, and
•Direct Action.

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Open Market Operations:
Open market operations refer to the deliberate and
direct buying and selling of securities in the money market
by the central bank.
In the narrow sense, open market operations refer to
the purchase and sale by the central bank of government
securities in the money market.
In the broad sense, open market operations imply the
purchase and sale by the central bank of any kind of
eligible paper, like, government securities, bills and
securities of private concerns, etc.

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Variable Cash Reserve Ratio:
The method of variable cash reserve ratio or changing
minimum cash reserves to be kept with the central bank by the
commercial banks is comparatively new method of credit control
used by the central banks.
Changes in the cash reserve ratio are a powerful method for
influencing not only the volume of excess reserves with the
commercial banks, but also the credit multiplier of the banking
system.
The significance of this method lies in the fact that increase
(or decrease) in the minimum cash reserve ratio, by reducing (or
increasing) the base of the cash reserves of the commercial banks
decreases (or increases) their potential credit creation capacity.

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Important objectives of fiscal policy are:
Optimum allocation of economic resources.
The aim is that fiscal policy should be so framed as to increase the
efficiency of productive resources.
Fiscal policy should aim at equitable distribution of wealth and
income.
Another objective of fiscal policy is to maintain price stability.
The most important objective of fiscal policy is the achievement
and maintenance of full employment.

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Instruments of Fiscal Policy:
Taxes,
Expenditure,
Public Debt and
Budget

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