of the barter system of exchange. Barter system refers to the system of exchange where goods and services are exchanged directly for other goods and services. For example, if a farmer produces. a batt double coincidence of — jU% ack of = persons may Hot desire to fen each other's goods; it in terms of f any common uni Zack © id Baers > nich the value of goods and services is ge when a person has 3 problem indivisible commodity which a Mrants to exchange for a small quantity ¥ ne other commodity, , 4, takof a reliable method of storing wealth use;Cocesier es given the most suitable definition ‘oney. He defines money as a: ing that is generally acceptable as a means of exchange and, at the same time, acts as a measure and store of value.”This is the most suitable definition of money for two reasons: 1. This definition emphasises all the three important functions of money, namely medium of exchange, measure of value and store of value. 2. It pinpoints on the basic characteristic of money, namely general acceptability,In a modern economy, the quantity of money in existence consists of (i) currency-coins and paper currency component and (ii) deposit money component.Coins refer to all metallic money. Examples of coins are 1, 2, 5 and 10 rupee coins. Coins are token money. Token money is the money the face value of which is more than its intrinsic (metallic) value. Token coins these days are usually made up of cheap metals like nickle, copper or bronze. They are generally of lower denominations. The face value of the token coin, say a ten rupee coin, is much higher than its metallic worth.Currency notes refer to paper money.Initially, central bank 1ssued curren tha was fully convertible into gold. It was, theres it known as convertible money. Convertible Pape, money refers to currency notes which cap converted into standard gold or silver coins, after the World War J, almost all the Countries of the world abandoned gold convertibility From that time onwards, paper money becay,, inconvertible, i.e., there is no compulsion for the central bank to exchange it for gold.CHiconvertible paper money acts as money because people have confidence in it as it is issued on the order (fiat) of the government. It is called fiat m because government has declared it a legal tender. It is circulated in the country on the order of the government. In a modern economy, the use of paper money is widespread. Paper money is economical. It is very convenient to carry paper money. It is also easy to store paper notes. Supply of paper money can be easily changed as per the needs of the economy.Deposit money or bank money refers to the deposits held with the banks on the basis of which cheques could be drawn. Customers of the banks deposit paper notes and coins with the banks for safekeeping. Each deposit is recorded as credit to the account of the bank’s customer, These deposits are payable on demand and they can be transferred from one person to another. On the basis of theseItis useful to remember one important distinction between currency and deposit money, Coins and currency notes are legal tender. They have the legal sanctionor backing of the government. They serve as money on the fiat (order) of the government. Being legal tender means that the individual is bound to accept it in exchange for commodities and services; it cannot be refused in settlement of payments of any kind. This is not true of chequable bank deposits. They are not legal tender. A person can legally refuse to accept payment through cheques and he can insist on payment in cash. This is because there is no guarantee that a cheque will be honoured by the bank in case of insufficient deposits with it. However, cheques are generally accepted by people for making payments.Money which is accepted as legal tender only up to a certain maximum amount. It cannot be forced upon the people beyond that limit. The maximum limit is set by the government under statute. In India, coins of small denominations, namely 5, 10, 20, 25 paise coins, are legal tender money only up to %25, A person may refuse to accept it beyond that limit. Unlimited legal tender, on the other hand, is the money which a person has to accept without any maximum limit. In our country, currency notes of all denomination and coins of 50 paise and higher denominations are unlimited legal tender.Money performs several important functions. Prof. Kinley has classified the functions of money into three groups: (i) Primary functions (ii) Secondary functions (iii) Contingent functions.Primary functions of money are as follows: 1. Medium of Exchange: The most important function of money is that it serves as a medium of exchange. This function of money is so important that the definition of money emphasises particularly this function of money. Money commands general purchasing power to purchase goods and services which people want. Money is generally and widely accepted as the medium with which most of the purchases or sales are made. Goods are exchanged for money while selling goods; and money can be used for buying any good that we need._2/Measure of Value: The second important function of money is that it acts as a common ‘measure of value’ or ‘unit of account’. Just as we use kilogram in measuring the weight of a commodity, similarly for measuring the value of a commodity, we take money as a unit of account. Since money is generally acceptable, it serves as a standard unit of measurement in terms of which the values of all goods and services are measured and expressed. When we express the value of a commodity in terms of money, it is known as price. Price is nothing but the units of money, say rupees, for which a unit of a commodity is exchanged or sold.1. Standard of Deferred Payments: Money serves as a standard of deferred paymen; Acting as a standard of deferred payments means that a payment to be made ip future can be stated in money terms. This is an extension of the medium of exchange function of money. Here again, money is used as a medium of exchange, but this time the payment is spread over a period of time. Thus, as soon as money is used as a medium of exchange and as a unit of value, it is almost inevitably used as the unit in terms of which all future or deferred payments are expressed.Asser of Value: Money also serves as a store " of value, i.e. people can keep their wealth in the form of money. In the barter system, ific commodities were used by the people to store wealth for future use. But there were many disadvantages in storing wealth in the form of goods and services such as rishable nature of certain goods, cost of storage, etc. Storing of value in the form of money has solved these difficulties, Money is the most economical and convenient way of storing wealth. It is true that there are other assets such as bonds, shares and debentures, etc., which also serve as store of value, and they compete with money in this regard. But money is. considered a better3. Transfer of Valu oney also serves as a convenient mode Of the transfer of value. This function of money arises from the general acceptability of money as a medium of exch Money helps us to sfer ue from one person to another: en we buy a pen for %20 from the shopkeeper, we are thereby transferring value to the shopkeeper by paying him %20 (price of the pen). Similarly, money is a quick and efficient means of transferring value from one place to another. We can sell a house in Delhi in exchange for money and can use the same money in buying a house in Kolkata. Thus,1. Maximisation of Utility: A rational consumer wants to maximise his utility (or satisfaction) while purchasing various goods and services. As explained in chapter 3, a consumer will be able to maximise his total utility if the ratios of marginal utilities of different commodities are equal to the price ratio of those goods. For equalising the marginal utilities, money plays an important role because prices of all commodities are expressed in terms of money.mployment of Factor Inputs: Every roducer aims at maximisation of his profits while empl various factors of production. A pYofit-maximising entrepreneur will equate marginal productivity (exp in value terms) of a factor with its price (rafe of remuneration). Since the rates of remuneration such as wage rate are expressed in money terms, it is money which helps the producer to arrive at decisions with regard to the number of units of a factor of production to be employed.3. Distribution of National Income: Use of money has facilitated the distribution of national income among various factors of production. Production is the outcome of combination and collective efforts of various factors of production. Contribution of these factors of production to the production of goods and services is rewarded not in terms of goods and services, but in money terms.4. Basis of Credit Systent® Credit plays a i e in the modern credit em. —in fact, commercial and business activities are highly dependent upon the credit tem. of t is money which provides the basis of the entire credit system. Without the existence of money, important credit instruments like cheques, bills of exchange, etc. cannot be used since these credit increments are claims over money. Money is at the back of all credit.or consumers. As sellers e factor services, households sell their factor services such as land, labour, etc. in exchange for money and earn money income thereby. They use this money income in purchasing goods and services.2-Significance of Money in Product: . Money is equally important fo the producer, enabling them to take decisions regargj ‘what to produce’ and ‘how to produce’. M, helps the producers to discover what people want and how much they want Prices of goods and services provide them, this information on the basis of which take production decisions. Producers sejj these goods and services in the marke in exchange for money. Similarly, they purchase various factor services in the factor market with the help of money.3-Tmportance_in Distribution; Factors of production need to be combined and used together to produce goods and services. This gives rise to the problem of distribution. Money has greatly facilitated the distribution of national product among different factors of production. FRefpr remunerations such as wages, rent, interest, etc. are paid in terms of money. Without money, the distribution of national product among various factors of production would indeed be extremely difficult.4. Significance of Money in Trade: Money has facilitated exchange and trade by Overcoming various shortcomings and difficulties of barter system of exchange. yAate use of money has simplified the exchange and has thereby promoted trade—both national and international.g. Importance in Public Finance: Money is of great help in the field of public finance. Public finance relates to the revenue and expenditure of the government. The magnitude of public finance in a modern economy is so vast that it cannot be managed without the use of money. Taxes, fees, fines and other forms of revenue of the government are realised in terms of money. These revenue proceeds areant” Supply of money refers to the stock of money held by the public at a point of time-as a means of payments and store of value. about money supply: 1. Money supply fe refers here to all economic units, including private individuals, business firms and institutions operating in the economy. It does not include the producers of money,namely the central bank, the government and the commercial banks. Thus, the currency held by the government in its treasury and money lying with the central bank and commercial banks is not included in money supply to avoid double counting. Further, this money is not in active circulation. Money supply refers to money in circulation, but the money held by the government in its treasury, central bank and commercial banks in their reserves is not in circulation. . Money supply is a stock concept and therefore, it is measured at a point of time such as money in circulation in India on Ast January, 2020.Total money supply in a country consists of two important components: (i) currency component and (ii) deposit component.= Currency notes and coins with the public (C) + Demand deposits of the people with commercial banks (DD) + Other deposits with the RBI (OD) such as deposits of public financial institutions, deposits of foreign central banks and foreign governments and international financial institutions.a) = M, + Saving deposits with post Office saving banks (SD) Thus, ‘M,-M, +8D Ss = M, + Time deposits with commercial banks (TD) Thus, M;=M,+1TD is = M, + Total deposits with the post office savings organisation excluding National Saving Certificates (TDP) Thus, My=M,+ TDPHowever, in recent years, the RBI has started using new measures of money supply as per suggestions of V.K. Reddy committee. These new measures are M,, M,, M,, M,. While the differences between the old measures and new measures are a matter of details, the new measure of money supply has introduced M, measure which is generally known as high powered money. = Currency in circulation + Currency deposits of the commercial bank with RBI + Other deposits with RBI.The central banks has direct control over high-powered money. The term ‘monetary base’ reflects the fact that the overall money supply depends ultimately on the monetary Tr .. amount of money issued by central bank. The -Monetary hase is referred to as_high-powered money because the monetary base_has a multiplied effect on the money supply. The term gh-powered reflects the fact that an increase in the central bank money (currency) leads to more than one-for-one increase in the overall money eunnly and ic therefare ‘hioh-nowered’ YouInflation is defined as a situation in which there is a ‘persistent’ and ‘appreciable’ increase in the general price level in an economy.Demand-pull Inflatior: Inflation originating ‘om the demand forces is called demand-pull ii ion. An increase in the aggregate demand in the economy leads to demand-pull inflation.Cost-pull Inflation: Inflation can be Caused by forces operating from the Supply side as well\Inflation originating from increase ; cost of production is known as cost-push or supply side-inflation. Cost-push inflation May be caused by increase in wage-cost, increase in profit margin, increase in prices of inputs like oil etc. An important cause of increase in cost of production is increase in wages. With the growth of powerful trade unions, workers are able to pressurise the employers to grant an increase in wage rate. When producers find that their labour cost is rising, they raise their Prices to cover the higher cost. A series of increase in wage rates leads to a persistent price rise. This is called wage push inflation. Another cause