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Contents

Definition of Money

Kinds Of Money

Functions Of Money

The Demand For Money

Four Money Supply definitions

Determination of Rate of Interest

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What is Money????

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DEFINITION

Money is a good that acts as a

medium of exchange in transactions,it is said that money act as a unit of

account, a store of value and medium

of exchange

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Properties Of Money

Liquidity

Scarcity

Portability

Uniformity

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Kinds Of Money

Commodity money

Convertible paper money

Inconvertible money

Bank deposits

Electronic money

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Commodity money

Can be used for other purposes.

Have inherent value.

Examples

Gold, Silk, Cattle, Silver

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Convertible Paper Money

The paper money that can be convertible

into gold and silver.Examples are Gold and Silver

certificates

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Inconvertible Paper Money

The paper money that cant be converted

into Gold and Silver.

Also called as Legal Tender Money.Examples are Notes and Coins issued by

government.

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Bank Deposits

In current society most of the money used

is Bank deposits

Examples of Bank Deposits areDemand deposits

Savings deposits

Time depositsNegotiable certificates of deposit

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Electronic Money

The money stored in certain electronic

cash cards.Transactions are made electronically.

Examples are Credit Card, Debit card,

Charge card etc

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Moneyas Medium of Exchange

No wastage of time.

Higher volume of transactions.

Remove the problem of coincidence of

wants.

Widely acceptable.

Increase level of Trade.

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Moneyas a unit of Account

Provide a common measurement for the

relative value of goods.

The monitory unit may have different

name in different countries.

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Moneyas a store of Value

Ability of money to store value over the

time.

Durability factor enables to convert yourincome into future purchases.

Completely liquid.

However inflation can destroy thisfunction.

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FIFTH FACTOR OF

PRODUC

TION Withdrawal of money from the system

would cause the production system to

collapse.

Production will decrease substantially.

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ACCELERATES PACE OF

PRODUC

TION Making factor payments quick and

efficient.

Sale of output speedy and efficient.

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LIFE BLODD OF MODERN

EC

ONOMY Circular flow

Pivot around which all the economicactivities cluster.

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Why people

hold money???

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Three motives of holding

money!!!

Transactions Demand

Precautionary Demand

Speculative Demand

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Transactions Demand

Stock of money to pay everyday

expenses.

Quick and easy purchases are main pushto hold money.

The holder has to suffer cost of holding,

namely interest rate you forego.

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Precautionary Motives

The stock of money for uncertain

expenses.

People who dont want to go for loanshave great interest to hold money.

Opportunity cost incurs of the interest

forego.

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Speculative Motives

Holding of money due to the expected rise

in interest rates.

People use to convert their money intointerest bearing instruments such as

bonds, stocks and other non-money

financial assets.

People hold more when interest rate is low

and hold less when interest rate is high.

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INTEREST

The major factor to determine the stock ofmoney held by people is the INTEREST!!!

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MoneySupply

Definitions

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Broad Money

M3 plus the publics deposits at non-bankfinancial institutions less currency and

bank deposits held by these NBFIs.

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Currency

Includes coins and paper money.

It constitute 20% of the M1 money supply.

Its purpose is to make small purchases.

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Cheque Account Deposits

The total of cheque accounts balances in

banks convertible to currency on demand

by writing a cheque without advance

notice.

Saving Deposits

Inteset bearing accounts in banks

drawnable by issuing pass book.

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Determination of

Interest Rate

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Equilibrium Interest Rate

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Excess quantity of money

demanded

Excess money

demand

Interest rate

rises

People sell

Bonds

Bonds prices

fall

Excess demand for money causes interest rates to rise.

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Excess quantity of money

supplied

Excess money

supplied

Interest rate

falls

People buy

Bonds

Bonds prices

rises

Excess supply for money causes interest rates to fall.

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Thanks a lottt!!!

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