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8/6/2019 Money-types & Definitions
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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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