characteristics and functions of money and components of money market ppt
Dr.NishaGupta,India,Teacher
Published Date:25-07-2017
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CPT Section C General Economics Chapter 8 Unit 1
CA Shweta Poojari 1.Concept of Barter System
2.Meaning & Definition of Money
3. Functions of Money
4. Classification of Money
5. Money Supply & Money Stock in India
6. Multiple Choice questions Barter system refers to direct exchange of goods &
Services i.e. Exchanging goods/services available with us
to buy the goods/services we need, because there was no
standard mode for settlement of transactions like “Money”.
Eg: One person has surplus of wheat wants cloth and
another person having surplus of cloth wants wheat. Lack of Double Coincidence
Lack of Divisibility
Lack of Measure of Value In Barter system person
having a surplus of one
commodity should be able
to find another person who
needs it and has something
to offer in exchange. There are certain goods which
are useful as a whole.
Eg: Horse, Cow, Table, etc.
These cannot be exchanged in
pieces for different things for
barter. There is no common measure in
barter system.
Suppose a Goat is to be exchanged
for rice, it is difficult to decide the
quantity of rice worth a goat. Money is also defined as,
“Money is What money Does” i.e. anything that performs the function of money is money.
Anything that is generally accepted as a medium of exchange.
According to Robertson “Money is anything which is widely accepted in payment for goods, or
in discharge of other kinds of business obligations.”
According to Kent “Money is anything which is commonly used and generally accepted as a
medium of exchange or as a standard of value.” Primary Secondary Continge
nt
Medium of exchange Store of value Basis of credit
Measure or unit of Standard for Liquidity
deferred payment Maximum utilization
value
of resources
Transfer of value
Guarantor of
solvency
Distribution of
National Income • Money as a medium of exchange is
Medium of
used in the sale and purchase of
goods and services.
Exchange:
• Money measures value of goods and
services and facilitates sale and
Measure
purchase of goods and services. The
value of each good and service is
of Value:
expressed as price of the commodity. • Money serves as store of value (i.e. Wealth
in liquid form). In modern world, people want
Store of
to have some currency notes or coin in their
pocket, home, bank account etc. to use any
Value :
time for purchase of anything.
Standard
• Money is also helpful in payment for goods
and services after lapse of time i.e. debts,
for deferred
loans and future transactions can be settled.
payments : • Sale and purchase of movable and
Transfer
immovable property can also be made
with the help of money.
of Value:
• It is the changes in the quantity of
Basis of
money that brings about changes in
supply of credit. The entire strength of
Credit:
credit system is based upon money. • Money is the most liquid asset which
can be converted into other assets
Liquidity:
quickly.
• In context of production &
Maximum
consumption, the producers and
consumers can make a Cost-Benefit
utilization of
analysis to ensure optimum utilization
resources:
of resources. • Money is the guarantor of solvency of a
Guarantor
person. If a person is able to pay his debt,
he will be called solvent. On the other
of
hand, if a person fails to honor his
obligations, he will be called as insolvent.
Solvency:
Distribution
• Money is helpful in measuring the
contribution to national income of various
of National
sectors of the economy, people of the
country.
Income: In Consumption & Trade (as a medium of exchange)
In Budgeting & Economic Policy formation
(Expenditures & Revenues expressed in money terms)
To measure National Income
In Production
(to compensate the factors of production i.e. rent, wages, etc)
Directs Economic Trends (directs idle resources into productive channels)
Encourages Division of Labour & Occupational Specialization Fiat Money & Fiduciary Money:
Fiat money, also known as currency is a legal tender . It has legal
power to discharge debts. The creditor cannot refuse to accept it.
Fiduciary money are the demand deposits of the bank. It is
accepted as money on the basis of the trust that issues it
command . A person can refuse to accept bank money (Cheque),
because there is no guarantee that the cheque will be honoured. Full Bodied Money, Representative Money &
Credit Money:
Full Bodied Money-
• The money, whose value as a commodity for non-
monetary purposes is as great as its value as money is
known as full-bodied money.
• Eg: Gold coins in gold standards, Silver coins in silver
standards or Gold and silver coins in bimetallic standard.
Full Bodied Money, Representative
Money & Credit Money:
Representative Money-
• Instead of actual metallic coins paper money is
used.
• The money has higher face value than its intrinsic
value is known as representative full bodied
money. Full Bodied Money, Representative Money &
Credit Money:
Credit Money-
• The money whose value is greater than the commodity
value of the material from which the money is made is
known as credit money.
• It can be in forms of token money, circulating promissory
notes issued by central government and deposit at banks. We have adopted at present managed paper currency standard with a
minimum reserve system of note issue in India.
The legal money, in which the government discharges its obligations , is
known standard money.
India is on paper currency standard because India’s monetary authority,
the Reserve Bank of India has adopted standard currency made of paper.
Paper currency in India is unlimited legal tender.
It means that it can be used to make payments and settle debts upto an
unlimited amount.
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