Wednesday, June 13, 2018

MONETARY SYSTEM P1

1
MONETARY SYSTEM

Money
   Anything which has general acceptance as means of payment.
   Functions of Money:-
o Medium of Exchange
o Common measure of value
o Standard for deferred payments
o Store of wealth
    Barter   System   –   A   commodity   is   exchanged   for   other
commodities.
o Problems of barter System are:-
    Double coincidence of what is required
Valuation of commodities exchanged is a problem
There won’t be a standard to serve as future monetary obligations

   Gresham’s Law – Bad money drives out good money
   Legal  Tender  Money  –  This  money  cannot  be  denied  in  the settlement of monetary obligation


Types of Money

1. Full-bodied money
It is the type of money whose value as money is equivalent to its value as commodity
•    E.g. – Gold coin

2.  Token  Money/Credit  Money/Paper
Money
Value as money is much more than the value as commodity
•    E.g. – Paper Currency

3. Representative full-bodied money
It is a kind of token money but is issued against the backing of equivalent  value  of  bullion (gold  and  silver  in  bulk)  with the issuing authority

o Limited Legal Tender Money : It is compulsory to accept upto a certain limit
    E.g. A sum of `10  can be paid in denominations of 50 paisa coins and the
recipient has to legally accept it.
o Unlimited Legal Tender Money : This money can be used to make any amount of payment
   Non Legal Tender Money – There is no legal compulsion to accept this money. It is also called optional money or Fiduciary Money (on the basis of trust).
o E.g. – Nepalese currency at India – Nepal border may be used as but recipient is not legally bound to accept it.
   Fiat Money – Serves as money on the order of the government. It is issued by government and theoretically may not be compulsory to accept.
   Near Money – Highly liquid financial assets like shares and bonds

MONEY SUPPLY

   Money Supply is the total stock of all types money (currency + deposit money) held with public
   Types of bank deposits

o Savings Account o Current Account o Fixed deposit
o Recurring deposit account

M1 = C + DD + OD (Narrow Money)

C            - Currency held by the public
DD        - Demand Deposits with Banks
OD        - Other deposits (Demand Deposits held by RBI)

Public refers to everybody except
Banks and Government



Demand Deposits (DD) – Can be withdrawn on demand from banks.
Time  Deposits  (TD)  –  Can  be  withdrawn only after a specific time.
DD+TD = Total Deposits


Other deposits include demand deposits with RBI. DD with RBI can be held only by Quasi- Governmental agencies, international agencies or former Governors of RBI





   M1 is known as narrow money as it includes only 100% liquid deposits which is a very narrow definition of money supply.

M2 = M1 + Savings account deposits with Post Offices

   M2 includes M1 and only saving account deposits with Post offices.
   Though the size of post office saving accounts is negligible M2 term is used as all the deposits in M2 are not liquid.

M3 = M1 + TD (Broad Money)

TD         - Time Deposits with Banks
Includes fixed deposits, Recurring deposits and
time liability of Savings accounts


   M3 is called Broad money as along with liquid deposits it also includes time deposits thus making it a broad classification of Money


M4 = M3 + Total Deposits with Post Office


   As the total deposits with post office is negligible there is not much difference between M3 and M4
   The most common measure used for money supply is M3
   Currently M3 is `76 lakh crore.








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