Qno: Explain the Paper Money?

Ans: Paper Money

Paper currency refers to the currency notes issued or used in a country. These notes are made up of special
kind of paper. Paper currency also includes notes (promissory) and cheques but they circulate as money
only in the countries where they are used freely for settling business transactions such as U.S.A and U.K.
In early times when notes were introduced they were backed by an exactly equal amount in gold or silver
kept by the issuing authority. Paper money is not wholly backed by some precious metal now. only a
proportionate reserves are maintained and a good deal of the paper money rests on peoples confidence in
the word of issuing authority generally the government or the central bank. Such a currency is also called
fiduciary issue.

Classification of Paper Money

Paper money may be of following types
(i) Representative Paper Money
When the paper money is backed by an exactly equal amount of in gold or silver kept in reserve by the
issuing authority it is known as representative money. Such notes could be exchanged for coins when
needed and did nothing more then to represent coins.
(ii) Convertible Paper Money
The currency notes which can be exchanged for full bodied or standard coins is called convertible money.
Its value is backed by a proportionate reserve of some precious metal and the confidence in the word of eh
issuing authority. It is also called fiduciary money.
(iii) Inconvertible Paper Money
The currency notes that cannot be converted in full-bodied coins. The issuing authority gives no promise for
its conversion. It can also be called fiat money.
Qno: Advantages and Disadvantages of Paper Money?
Ans: Advantages of Paper Money
Following are some advantages of the paper money
1. Economical
Currency notes are cheapest media of exchange. Paper money practically costs nothing to the government.
It does not need to spend anything on the purchase of gold for minting coins. Certain other expenditure or
losses associated with metallic coins are also avoided.
2. Convenient
Paper money is the most convenient mean of money. A large amount can be carried conveniently in the
pocket without any body knowing about it. It possessed in very large measure the quality of portability,
which a money material should have.
3. Homogenous
Among the coins there are good and bad coins. But currency notes are all exactly similar. It is therefore the
substitute medium of exchange.
4. Stability
The value of money can be kept stable by properly regulating its issue. Managed proper currency method is
therefore adopted by many countries.
5. Cheap Remittance
Money in the form of currency notes can be cheaply remitted from one place to another in an insured

Muhammad Farhan M.ED Gold Medalist, MCS, ICMA (IV)

Model College For Girls

cover.
6. Elasticity
Paper money is absolutely elastic. Its quantity can be increased or decreased at the will of the currency
authority. Thus paper money can better meet the requirements of trade and industry.
7. Advantages to the Banks
Paper money is of great advantage to the banks. They can keep their cash reserves against liabilities in this
form, for currency notes are full legal tender.

Disadvantages of Paper Money

Its disadvantages are as follows
1. No Value Outside the Country
Paper money is of no value outside the country where it is issued. Gold and silver coins were accepted even
by foreigners as they had no intrinsic value.
2. Risk of Damage
There is always a possibility of damage to the paper. Fire may burn it, water may tear it etc.
3. Danger of Over Issue
A serious drawback in paper currency is the ease with which it can be issued. There is always a danger of its
over issue when the government is in financial difficulties. Once this course is adapted the momentum
leads to further notes printing until it losses all the value. This over issue of notes is called over inflation.
4. Price Increase
Some times especially when the money loses its value there is always an increase in the price of goods. As a
result, labors and other people with fixed income suffer greatly. The whole public feels the pinch.
5. Effect on Business
During the days of monetary stringencies in a monetary economy, the business activities are affected very
badly. The indirect result of price increase, shortage of currency etc., result in a fall of exports and a rise in
imports. It leads to the export of gold from the country, which is not a desirable thing. Its balance of
payments gets unfavorable.
Qno: Explain the Theory of Rent
Ans: Theory of Rent
In ordinary sense the term rent refers to the hiring charges paid to the owner of an asset for using his right
of ownership for a specific period of time. In economics the term rent is called economic rent. It is defined
as
That part of the payment by the tenant, who is made only for the use of land i.e. free gift of nature.
In economics rent is mainly related to agriculture and is mainly distinguished as economic and contact rent.
Economic Rent and Contact Rent
Sometimes the agriculturist tenant makes the payment which consist on capital made by the landlord such
as drainages, wells etc. This part of the payment, which consists of the interest on capital made by the
landlord, is called contact rent. Whereas the part of the payment which is made for the use of land only is
called economic rent.
Rent and Transfer Earnings the concept of the rent is also explained by the help of transfer earnings. The
Muhammad Farhan M.ED Gold Medalist, MCS, ICMA (IV)

Model College For Girls

amount which factor can earn in its next best paid alternative use called transfer earning. In this sense if
the factor is earning above its transfer earnings, the surplus or excess earnings is called economic rent.
Qno: Explain the Recardian Theory of Rent
Ans: Recardian Theory of Rent
The British economist Devid Recardo propounded the theory of rent a century ago.
The Recardian theory of rent can be stated as
Rent is that portion of the produce of earth which is paid to the land lord for the use of original and
indestructible power of soil.
Assumptions
The Recardian theory of rent is based on the following assumptions.
1. Rent is paid to the landlord for the use of original and the indestructible power of land.
2. Rent is a differential return due to the differences in the fertility of land as well as their locations. The
more fertile land the higher will be its rent and vice versa.
3. The Recardian theory depends on the historical order of cultivation i.e. the more fertile land is cultivated
first and such rent does not pay rent in the beginning but as but as other grades of land come under
cultivation it begins to pay the rent.
4. The land on which the cost of production is equal to the amount it produces is a no rent land or marginal
land.
Economic rent according to Recardo is the true surplus left after the expenses of cultivation as represented
by payment to labour, capital and enterprise.
Qno: Explain the Quasi Rent.
Ans: Quasi Rent
The concept of Quasi rent was first introduced by Marshal according to him, quasi rent is a surplus earned
by investments of production other then land. It is the income derived from appliances and machines,
which are the product of human effort. Quasi rent stands for whole of the income, which some agents of
production yield when demand for them is suddenly increased. It is earned during a period that their supply
cannot be increased in response to increase in demand for them. Hence it is a short period concept. It has
also been defined as the excess of total revenue earned in the short run over and above the total variable
costs.
QUASI RENT = TOTAL REVENUE TOTAL VERIABLE COST
The concept of quasi rent can be understood with the help of an example. At the time of independence of
Pakistan, the demand for houses increased due to sudden increase in population but the supply could not
be increased due to the scarcity of building material. The abnormal increase in the return on capital
invested in capital (building) is quasi rent.

Muhammad Farhan M.ED Gold Medalist, MCS, ICMA (IV)

Model College For Girls

Qno: Explain the Modern Theory of Rent

Ans: Modern Theory of Rent
This theory is also known as demand and supply theory of land. It is based on the following assumptions:
1. There is always perfect competition among various cultivations.
2. The fertility of different lands is same.
3. The land is used for a particular job.

Muhammad Farhan M.ED Gold Medalist, MCS, ICMA (IV)

Model College For Girls