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exchanges.
Double coincidence of wants.
Money also acts as a convenient unit of account. The value of all goods and services
can be expressed in monetary units.
The first and foremost role of money is that it acts as a medium of exchange.
Demand deposits as they are payable by the bank on demand from the account
holder.
Fixed deposits, have a fixed period to maturity and are referred to as time deposits.
Currency notes and coins are therefore called fiat money. They do not have intrinsic
value like a gold or silver coin. They are also called legal tenders as they cannot be
refused by any citizen of the country for settlement of any kind of transaction.
Cheques drawn on savings or current accounts, however, can be refused by anyone as
a mode of payment. Hence, demand deposits are not legal tenders.
The total stock of money in circulation among the public at a particular point of time is
called money supply.
Money supply, is a stock variable.
M1 = CU + DD
M2 = M1 + Savings deposits with Post Office savings banks
M3 = M1 + Net time deposits of commercial banks
M4 = M3 + Total deposits with Post Office savings organisations (excluding National
Savings Certificates)
CU is currency (notes plus coins) held by the public and DD is net demand deposits held
by commercial banks
The word net implies that only deposits of the public held by the banks are to be
included in money supply.
The interbank deposits, which a commercial bank holds in other commercial banks, are
not to be regarded as part of money supply.
M1 and M2 are known as narrow money.
The number of times a unit of money changes hands during the unit period is called the
velocity of circulation of money.
An individual may hold her wealth in the form of landed property, bullion, bonds, money
etc. For simplicity, let us club all forms of assets other than money together into a single
category called bonds. Typically, bonds are papers bearing the promise of a future
stream of monetary returns over a certain period of time. These papers are issued by
governments or firms for borrowing money from the public and they are tradable in the
market.
The value of K has been assumed to be stable in the sense that the
determinants of K do not change significantly in the long run.
K in the Cambridge equation was just the reciprocal of V in Fisner's
equation (i.e., K = 1/V).
The General Theory of Employment, Interest and Money-Keynes
Keynes identified three motives for the demand for money or the
liquidity preference: (a) the transactions motive, (b) the precautionary
motive, and (c) the speculative motive.
Keynes, the total demand for money implies total cash balances and
total cash balance may be classified into two categories: (a) active
cash balances consisting of transactions demand for money and
precautionary demand for money, and (b) idle cash balancesconsisting of speculative demand for money.
Define :Transaction Motive
Define : Precautionary Motive
Idle Cash Balances or Speculative Demand for Money
The speculative demand for holding money balances is the unique
Keynesian contribution.
With the given the level of income, the speculative demand for money
and the current rate of interest are inversely related.
the demand for money for speculative motive is highly sensitive to and
is a
negative function of the rate of interest
Modern View.
The basic difference between the traditional and modern views is due
to heir emphasis on the medium of exchange function of money and
the store of value function of money respectively.
Currency money is legal tender money and thus is called high-powered
money.
one rupee note and the coins are issued and managed by the Finance
Ministry of the Government of India.
All other notes are issued and managed by the Reserve Bank of India.
in India, the minimum reserve method is the governing principle of
note issue.
Factors Influencing Currency Money
Volume of Transactions.
Nature of Trade.
Method of Payment.
The Price level.
Banking Habits.
Distribution of Income.
Other Factors.
Bank Money
The money created by the banks is known as secondary money.
total money supply in an economy is composed of (a) the primary or
high-powered money. And (b) the secondary or bank money
The relative proportions of the two constituents of money supply, i.e.,
currency money and bank money, depend upon the degree of
monetisation of the economy, the development of the banking system
and the banking habits of the people.
Types of Inflation
On the Basis of Speed
Creeping Inflation: rise about 2 percent annually.
Walking Inflation: 5 percent annually.
Running Inflation: 10 percent annually
Galloping or Hyper-Inflation:
On the Basis of Inducement
Wage-Induced Inflation.
Profit-Induced Inflation
Scarcity-Induced Inflation.
Deficit-Induced Inflation.
Currency-Induced Inflation.
Credit-Induced Inflation.
Foreign Trade-Induced Inflation
On the Basis of Time
Peace-Time Inflation.
War-Time Inflation.
Post-War Inflation.
On the Basis of Scope
Comprehensive Inflation.
When the prices of all goods and services increase throughout
the economy, it is the case of comprehensive inflation. This leads
to a rise in the general price level
Sporadic Inflation.
Sporadic inflation is sectoral inflation, since, instead of affecting
whole economy, it affects a few sectors.
On the Basis of Government Reaction
Open Inflation.
in certain
reason for
and trade
known as
Effects of Inflation
Effects on Product
Disrupt Price System.
Reduces Saving.
Discourages Foreign Capital
Encourages Hoarding.
Encourages Speculation Activities
Reduces Volume of production.
Affects Pattern of Production.
Quality Fall.
Effects on Distribution
Debtors and Creditors.
During inflation, the debtors are the gainers and the creditors are the
losers.
Wage and Salary Earners. Wage and salary earners usually
suffer during inflation
Fixed Income Groups. The fixed-income groups are the worst
sufferers during inflation.
The business community, i.e., the producers, traders,
entrepreneurs, speculators, etc., stand to gain during inflation,
Investors. The effect of inflation on investors depends on in
which asset the money is invested.
Farmers. Farmers generally gain during inflation
Non-Economic Consequences
Social Effects. Inflation is socially unjust and unequitable
because it leads to redistribution of income and wealth in favour of the
rich. This widens the gap between haves and have-nots and creates
conflict and tension in the society.
Moral Effects. Inflation adversely affects business morality and
ethics. It encourages black marketing and enables the businessmen to
reap wind-fall gains by undesirable means In order to increase the
profit margin the producers reduce the quality by introduction of
adulteration in their products.
Political Effect. Inflation also disrupts the political life of a
country.
Control of Inflation
Monetary Policy
Monetary policy is adopted, by the monetary authority or the central
bank of a country to influence the supply of money and credit by
changing interest rate structure and availability of credit.
Increasing Bank Rate
Sale of Government Securities.
Higher Reserve Ratio.
Selective Credit Control.
Consumer Credit Control.
Higher Margin Requirements.
Monetary measures alone will not be sufficient when there are costpush inflationary pressures.
If the inflationary price rise is due to scarcity of output, then the
monetary policy will not be of much use.
Monetary policy will also not help in controlling inflation if the inflation
is due to deficit financing
Excess reserves possessed by the commercial banks can make the
monetary measures of the central bank to control inflation ineffective.
The greatest merit of monetary policy is its flexibility
Fiscal Policy
10. The
5. The Laspeyre index is easier to calculate than the Paasche index. TRUE/FALSE.
6. You cannot directly compare years with the Paasche index TRUE/FALSE
7. It is not possible to have an index below 100.
TRUE/FALSE.
8. If the price index of bananas was 100 in 1993 and that for apples was 110, then the price
of a kg of bananas was:
a. Less than for apples
b. More than for apples
c. Impossible to compare