Money & Banking - 01
Money is a generally accepted, recognized, and centralized medium of exchange in an economy that is used to facilitate transactional trade for goods and services. The use of money eliminates issues from the double coincidence of wants that can occur in bartering.
FUNCTIONS AND SIGNIFICATION OF MONEY
MEDIUM OF EXCHANGE –
All market transaction in our economy made in the form of currency as a medium of exchange .
UNIT OF ACCOUNT – Money can be used to keep track of the money gained or lost across multiple transactions and to compare money values of various combinations of different quantities of different goods and services mathematically. This makes things such as accounting for profit and loss of a business, balancing a budget, or valuing the total assets of a company all possible.
STORE OF VALUE – It is a repository of purchasing power which means most of does not want to spend or income immediately upon receiving if but rather to wait unit we have the time can desire to shop.
STANDARD OF DEFERRED PAYMENT –
Money facilitates to find Deferred Payment Of Loan, Pension, along with Fluctuations Of The Value Of Money.
DEMAND FOR MONEY
Money is the most liquid of all assets in the sense that it is universally acceptable and hence can be exchanged for other commodities very easily. On the other hand it has an opportunity cost. If instead of holding on to a c
ertain cash balance, you put the money in fixed deposit in some bank you can earn an interest on that money. While deciding how much money to hold at a certain point of time one has to consider the trade-off between the advantages of liquidity and the disadvantage of foregone interest. Demand for money balance is thus referred to as liquidity preference. Hence people desire to hold money in two broad motives.
The principal motive for holding money is to use it for transactions. It is satisfied by Way Of Income, Bank Balance i.e. the money available in hand in liquid form to carry out transactions.
The number of times a unit of money changes hands during the unit period is called Velocity Of Circulation Of Money.
There is a relationship between aggregate demand for transaction money and nominal GDP.
It is a positive correlation i.e. when the nominal GDP increases or the general price level increase, the total value of transactions increase hence the transaction demand for money also increases.
Individuals hold wealth in other forms than money as Property, Gold Or Bonds. When money is treated as a commodity (in different forms like bond, securities, stock etc.) it is referred to as speculative demand. Bond is a paper bearing a promise of future stream of monetary returns over a certain period of time. Holding of these bonds has an opportunity cost by way of interest yielding. The interest rate it yields and the speculation of it is Known As The Speculation Demand Of Money. The interest rate has an inverse relationship with speculative demand. If the interest rate increase the bond will increase and hence the bond price will decrease and this will lead to capital loss. Anticipating this Liquidity (In Cash) is maintained as wealth and hence the speculative demand of money is infinite. This situation is referred to as Liquidity Trap. It is a situation where very low interest rates in the economy and every economic agent expect the interest rate to rise in future consequently and bond prices to fall causing capital loss.
MONEY SUPPLY IN INDIA
The total stock of money in circulation among the public at a particular point of time is Called Money Supply. It is a stock variable like demand.
Money supply Refer To Total Supply Money or in active circulation in a given country economy at given time. If refer to the money held by public which include all economic unit (Private, Indigently Business firm) It does not include the producers of money (RBI, Government, Commercial bank) to avoid double counting.
LEGAL TENDER – It is a promise to give purchasing power (given by RBI) equal to the value printed on the note.
Note: Cheques And Demand Draft does not have legal tender. Which means the receiver can reject to accept cheque or DD as unit of money. In India only paper currency notes and coins have legal tender.
IMPORTANCE – Growth of money supply is an important factor not only for acceleration of the process of economic development but also for the achievement of price stability in the economy. The flow of money is circulation is the main tool of RBI to control the price level and achieve stability in economy. There must be controlled expansion of money supply if the objective of development with stability is to be achieved. A healthy growth of an economy requires that there should be neither inflation nor deflation. Hence the central bank uses various measures and tool to classify the money circulating in the economy.