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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
Measure or unit of
value
Store of value
Standard for
deferred
payment
Transfer of value
Basis of credit
Liquidity
Maximum utilization
of resources
Guarantor of
solvency
Distribution of
National Income
Medium of
Exchange:
Measure
of Value:
• Money as a medium of exchange is
used in the sale and purchase of
goods and services.
• Money measures value of goods and
services and facilitates sale and
purchase of goods and services. The
value of each good and service is
expressed as price of the commodity.
Store of
Value :
• Money serves as store of value (i.e. Wealth
in liquid form). In modern world, people want
to have some currency notes or coin in their
pocket, home, bank account etc. to use any
time for purchase of anything.
Standard
for deferred
payments :
• Money is also helpful in payment for goods
and services after lapse of time i.e. debts,
loans and future transactions can be settled.
Transfer
of Value:
• Sale and purchase of movable and
immovable property can also be made
with the help of money.
Basis of
Credit:
• It is the changes in the quantity of
money that brings about changes in
supply of credit. The entire strength of
credit system is based upon money.
Liquidity:
• Money is the most liquid asset which
can be converted into other assets
quickly.
Maximum
utilization of
resources:
• In context of production &
consumption, the producers and
consumers can make a Cost-Benefit
analysis to ensure optimum utilization
of resources.
Guarantor
of
Solvency:
• Money is the guarantor of solvency of a
person. If a person is able to pay his debt,
he will be called solvent. On the other
hand, if a person fails to honor his
obligations, he will be called as insolvent.
Distribution
of National
Income:
• Money is helpful in measuring the
contribution to national income of various
sectors of the economy, people of the
country.
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 nonmonetary 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.
Money Supply means the total amount of
money available in the economy.
In other words, money supply refers to the
volume of money held by the people in the
country for transactions or for settlement of
debts.
Central Bank
Commercial bank
Government
Volume of Trade
Balance of Payment
Price Level
Distribution of National Income
Banking Habits of people
Central Bank can:
Sell securities in the Market
OR Increase the bank rate / Margin
requirements/ CRR, etc
The Result is:
People’s money gets invested in the
securities
Commercial Banks will Lend lesser
money
The Result is:
Money comes to RBI / Govt. - Less
money in the Market
If People cannot borrow much they
have less Money
Central Bank can:
Purchase securities in the Market
OR Decrease the bank rate / Margin
requirements/ CRR, etc
The Result is:
People sell securities with them and
now have more money
Commercial Banks will Lend more
money
The Result is:
Money flows from RBI / Govt. – more
money in the Market
If People can borrow more they have
more Money
If People have a
habit to save
Commercial Banks
have more money to
lend
Hence, Money
supply in the
economy would
increase.
Volume of Trade
Price Level
• Larger the
volume of trade,
larger the money
flow
• i.e. more
purchase and
sale means
money is
changing hands
more number of
times.
• The General
Price Level will
also affect the
volume of trade.
• If necessities are
expensive,
people spend
larger portion of
income.
• Therefore, less
savings by them.
Distribution of
National Income
• If there is
unequal
distribution of
National Income:
• Most of the
population is
poor and money
gets
accumulated in
very few hands
which will restrict
the money flow.
In 1979 the RBI classified Money Stock in India in following 4 categories:
M1 = Currency with the public
(Coins + Currency notes + Demand deposits of the public) Also known as Narrow Money.
M2 = M1 + Post office savings
M3 = M1 + Time Deposits of the public with banks
(Also called Broad Money)
M4 = M3 + Total post office deposits.
The basic distinction between Narrow Money (M1) and Broad
Money (M3) is the treatment of time deposits with the banks. In the
present context, total Money Stock in India refers to M3 only.
The RBI working group has now redefined its parameters for
measuring money supply. i.e.
New Monetary Measures.
NM1 = Currency + Demand Deposits + other deposits with RBI.
NM2 = NM1 + Time Liabilities portion of saving deposits with banks +
Certificates of deposits Issued by banks + Term deposits maturing
within a year excluding FCNR deposits.
NM3 = NM2 + Term deposits maturing within a year + call/term
borrowings of the banking system.
M4 has been excluded from the new monetary aggregates.
MCQs
a. Lack of common
measure of value.
b. Lack of double
coincidence of wants.
c. Difficulty in storage of
extra goods.
d. All of the above.
Answer: D
Explanation: Refer
Slide No.4
a. Medium of exchange
b. Measure of value
c. Standard of deferred
payments
d. All of the above
Answer: D
Explanation: All the
Options refer to some
function of Money
and money is also
defined as “Money is
what money does”.
a. Medium of
exchange
b. Measure of value
c. Standard of
deferred payments
d. All of the above
Answer: A
Explanation: Money as a
medium of exchange is
used in the sale and
purchase of goods and
services. Therefore,
double coincidence of
wants is not required.
a. Paper
b. Metal
c. Foreign
d. Dollar
Answer: A
Explanation: Refer
Slide No.20
a. Rs 5 note
b. Rs 10 note
c. Rs 1 note
d. None of the above
Answer: C
Explanation: Rupee 1
Notes and Coins are
issued by the Ministry
of Finance.
a. Balanced
b. Maximum
c. Minimum
d. Neutral
Answer: C
Explanation: Refer
Slide No.20
a. Stock of money held by public
at a point of time in an economy.
b. Flow of money held by public at
a point of time in an economy.
c. Flow of money held by
government at a point of time in an
economy.
d. Stock of money held by
government at a point of time in an
economy.
Answer: A
Explanation: Refer
Slide No.21
a. Currency
b. Deposit
c. Both currency and
deposit
d. None of the above
Answer: C
Explanation: Refer
Slide No. 27
a. M1
b. M2
c. M3
d. M4
Answer: A
Explanation: Refer
Slide No. 27
a. M1
b. M2
c. M3
d. M4
Answer: C
Explanation: Since M3 also
includes Time Deposits with
the banks, it indicates the store
of value function of money.
a. M1
b. M2
c. M3
d. M4
Answer: A
Explanation: Refer
Slide No. 27
a. M1
b. M2
c. M3
d. M4
Answer: C
Explanation: Refer
Slide No. 27
a. NM1
b. NM2
c. NM3
d. NM4
Answer: C
Explanation: Refer
Slide No. 29
a. Treatment of Post
office Deposits
b. Treatment of Time
Deposits of Banks
c. Treatment of
Savings Deposits of
Banks
d. Treatment of
Currency
Answer: B
Explanation: Refer
Slide No. 28
a. There are many assets which carry the
attributes of Money
b. Money is what Money does
c. In modern sense, Money has stability
substitutability & feasibility of measuring
statistical variations
d. None of the above
Answer: D
Explanation: Refer
Slide No. 8