UREN Cen oy
Anything that is generally acceptable as a means of exchange 8
at the same time, acts as a measure & store of value.
Kinds of money
1. Currency - coins and paper currency component
2. Deposit money component
Coins are token money: Token money is the money the face
value of which is more than its intrinsic (metallic value)
+ Currency notes: central bank issued currency that was fully
convertible into gold. It was, therefore, known as convertible
money.
‘+ Inconvertible paper money: Acts as money because people
has confidence in it as it is issued on the order (fiat) of the
government. it is called fiat money because government
has declared it a legal tender.
+ Deposit money or bank money: Refers to the deposits held
with the bank on the basis of which cheques could be
drawn
ae 7, BOOSTER+ Legal tender money: Legal tender money may be limited ot
unlimited legal tender. Limited legal tender is the money
which is accepted as legal tender only up to certain
maximum amount. It cannot be forced upon the people
beyond that limit.
* Unlimited legal tender money: On the other hand, is the
money which a person has to accept without any
maximum limit.
Functions Of Money
Primary functions:
1. Medium of exchange: The most important function of
money is that it serves as a medium of exchange. Money
commands general purchasing power to purchase goods
and services which people want.2. Measure of value: The second important function of money
is that it acts as a common ‘measure of value ‘or unit of
account. Money serves asa unit of measurement in terms of
which the values of all goods and services are measured and
expressed,
Secondary Functions:
Standard of Deferred Payments: Money serves as a
standard of deferred payment. Acting as a standard of
deferred payments means that a payment to be made in
future can be stated in terms of money.
2. Store of value: Money also serves as a store of value, i.e,
people can keep their wealth in the form of money.
3.Transfer of value: Money also serves as a means to transfe!
value. This function of money arises from the general
acceptability of money as a medium of exchange. Money
help us to transfer value from one person to another.Cerrone Cet r
1- Maximisation of utility: A relation consumer wants to.
maximise this utility (or satisfaction) while purchasing various
goods and services.
2- Employment of factor inputs: Every producer aims at
maximisation of his profits while employing various factors of
production. 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: Production is the outcome
of combination and collective efforts of various factors of
production. Production of goods and services is rewarded not
it terms of goods & services, but in money terms.
4- Basis of credit system: It 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. money is at the back of all credit.
7% BOOSTERSupply of money:
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.
1. Money supply refers to the money held by the public in a
country. The term public refers here to all economic units,
including private individuals, business firms and institution
operating in the economy. Money supply refers to money in
circulation, but the money held by the government in its
treasury, central bank and commercial bank in their reserves
is not in circulation.
2. Money supply is a stock concept and therefore, it is
measured at a point of time.
Components of money supply:
1. Currency: It includes both Paper currency and coins issued
by the government and the central bank of the country.2. Deposit money: It refers to the demand deposits held by
the public with commercial bank on the basis of which
cheques can be drawn. Demand deposits held by the public
are also called bank money.
M1 = Currency held by public + Demand deposits held by
public with the commercial banks.
M2 = Currency held by public + demand deposits held by
public with the commercial bank + Time deposits (including
saving deposits) held by public with the commercial bank.
Measure of money supply in India:
M1 = Currency notes and coins with the public (C) + Demand
deposits of the people with commercial bank (DD) + other
deposits with the RBI (OD) such as deposit of public financial
institution, deposits of foreign central banks and foreign
governments an international financial institution.
se 7 ROOSTERThus, M2 = C+ DD + OD
M2'= M1 + savings deposits with post office saving banks
(sd)
Thus, M2 = M1 + SD M3 = M1= Time deposits with
commercial bank (TD)
Thus, M3 = M1 + TD
M4 = MB + total deposits with the post office saving
organisation excluding national saving certificates (TDP)
Thus, M4 = M3 + TDP
High Powered Money- It consists of currency held by public
& the banks & deposits held by the banks as reserves with
the central bank.
MO= Currency in Circulation + Currency deposits of the
commercial bank with RBI + Other deposits with RBI
am” 7 ROOSTER