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GAURAV. H .TANDON
GAURAV. H .TANDON

This document defines money and discusses its key functions. It notes that money acts as a medium of exchange, unit of account, standard of deferred payment, store of value, and means of transferring value. The document outlines different forms of money including cash money created by central banks and credit money created by commercial banks through loans. It also discusses quantity theories of money, how money supply is measured, and references for further reading on macroeconomic topics related to money.

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Money (Macro-economics)
Money Definition • A medium of exchange. • With the help of money any exchange of goods and services can take place. • Money is said to be the most liquid asset among all the assets of a man. • It has general acceptability as a means of payment and liquid characteristic. Keynes called this Liquidity preference.
Money
Money • Generally money is created by the Central Bank or the Government of a country. • These are legal tender money as there is legal compulsion for their acceptance. • They also called as Cash Money. • Another considerable flow of money is Credit Money—created by the commercial banks by their loan transactions
Cash Money Vs Credit Money
Money • Money is regarded any object which is generally accepted as: • medium of exchange • unit of account i.e. common measure of value • standard of deferred payment • store of value • transfer of value.
Money
Functions Of Money
Money
Primary Functions • As medium of exchange, money is used as a means of payment. • As money has ready purchasing power, it facilitates in transacting exchange of goods and services with minimum effort and time.
Primary Functions • As unit of account, money is treated as common measure of value. • value of all goods and services in exchange can be expressed in terms of money. • Such expression gives rise to price system in which money act as a means of calculating the relative prices as absolute prices of goods and services.
Unit Of Account
Secondary Functions • As standard of deferred payment, money can be used in the settlement of debt and future payments. • Loans are advanced and future contracts are settled in terms of money.
Secondary Functions • As store of value, money is hold as an asset in liquid (or cash balance) to use anytime in future. • This is because money has purchasing power which holds commands over goods and services all time – at present and in future. • However use of money as store of value is not without drawbacks. Changes in general price level causes rise and fall in the value of money. When price level rises, value of money falls and vice versa.
As Store of Value
Secondary Functions • As transfer of value, sale and purchase of movable and immovable assets, paper wealth and physical wealth can be made with the help of money. • Thus, value available in the form of asset can be transferred from one person to another with the use of money.
As Transfer of Value
Value Of Money • It means Exchange Value. • It implies how much of goods and services can be obtained in-exchange of a unit of money. • Value of money is inverse of price. • When price level increases, the value of money decrease and vice versa.
Exchange Value
Forms of Money • The total money supply of a country can broadly be classified into two groups — • Cash Money and Credit Money. • It also includes all other financial assets. • The degree of moniness varies widely from asset to asset.
Cash Money and Credit Money
The Components of Money Supply
Forms of Money • In modern monetary transactions, the total stock of money or money supply includes the following: • Metallic money or currency coins • Standard or Full-bodied Coins. • Token coins • Paper Money Or Paper Currency • Credit Or Bank Money
Paper Money & Currency Coins
Metallic Money Or Currency Coins • It refers to the coins made out of metal like gold, bronze, silver, copper, nickel. • Standard or Full-bodied Coins are those coins whose face value is equal to its intrinsic (metallic) value. • Token coins have intrinsic (metallic) value less than its face value. • They generally are of lower denominations are made of cheap metals like nickel and copper. • Token coins are used for exchange of small value.
Metallic Money Or Currency Coins
Standard or Full-bodied Coins.
Paper Money Or Paper Currency • Paper money consists of currency notes issued by the State Treasury or the Central bank of the country.
Paper Money Or Paper Currency
Credit Or Bank Money • Bank demand deposits withdraw-able by issuing cheque has started functioning as money, and cheque are conventionally accepted as a means of payment by the business community in general.
Credit Or Bank Money
Forms of Money • In short, anything and everything that has served as money is generally recognized and accepted as means of payments. But all can serve a good money. • Good money should poses the attributes of general acceptability, cognizability (capable of being known), portability, divisibility, durability, uniformity, adequacy and stability of value.
Good Money Vs Bad Money
Legal Tender And Conventional Money • In modern era, currency money and bank money together constitute the total stock of money or money supply. • Currency money (both currency coins and currency notes) is legal tender money or fiat • money and has general acceptability. • Credit money or bank demand deposits are conventional money and lacks general acceptability.
Legal Tender And Conventional Money
Gresham’s Law • The Law states that bad money drives good money out of circulation. • This is true in-case of bimetallism where two metal standard (gold and silver) operate side by side. In such a case one metal currency drives the other out of circulation. If also means cheap money drives out dear money. • If a country Uses both paper money as well as metal money, people will use the paper money and hold the metal money.
Gresham’s Law
Quantity Theory Of Money • Quality theory of Money can be analyzed by two different approaches: (1) Fisher’s Theory (2) Cash Balance Approach
Fisher’s Theory • The theory explains the relationship between money supply and price level. • Irving Fisher used an equation [MV=PT] • M stands for total Money Supply. • V means velocity of circulation money which implies the average number of times that a unit of Money changes hands during a particular period. • P is Price level i.e. average price of GNP. • T is Total National output. • Fisher used the equation to show the relationship between money supply and price level as direct and proportional. • The rate of change in money supply (dM/M) is equal to rate of change in P (dP/P). • Graphically the curve showing the relation between M and P will be a 45 degree line passing through the origin.
Quantity Theory Of Money
Fisher’s theory is based upon three assumptions • The relation between M and P will be proportional only when there are no changes in the value of V • And T i.e. V and T are constant variables. • (a) Velocity of circulation of money depends on the spending habit of people. Spending habit of • People is, more or less, stable. Hence V will be constant normally. • (b)T or GNP will be constant in situation of full employment when all the available factors of production are fully employed. At less than full employment, more money will lead to more output by utilizing unused factor. Hence P will not rise. • (c) Fisher’s theory assumes that money is demanded for the transaction purposes only. People spend Their entire income instantly for transaction.
Cash Balance Approach • It states that it is not total money but that portion of cash balance people spend that influences Price level. • True people hold cash balance in their hands instead of spending the entire amount all at once. • The equation is M=PKT. • Here, M=money supply, P=price level, T=total volume of transaction, K=the demand for money The people want to held in hand.
The Quantity Theory by Keynes • Keynes reformulated the Quantity Theory of Money. • In his opinion the quantity of money does not directly affect price level. • A change in the quantity of money may lead to a change in the rate of interest. • With a change in the rate of interest the volume of investment is quite likely to change. • A change in investment will lead to a change in income, output and employment and also a Change in cost of production. • This will lead to the change in prices of goods and services. • The Keynesian version of the Quantity Theory integrates monetary theory with the general theory of value
Money Supply • The total stock of money circulating in an economy is the money supply. • The circulating money involves the currency, printed notes, money in the deposit accounts and in The form of other liquid assets. • Monetary policy of a country is concerned with the supply of money. • Narrow money supply is called M1 It consists of notes and coins in circulation and demand deposits with banks and central bank.
Money Supply
Money Supply • As they are quickly and easily used for transactions, they are called transactions money. • Broad money supply, M2, consists of M1 Plus other deposits (savings deposits, time deposits, etc.). • There are some differences in the definitions of money supply from country to country. • To give the best definition of money supply, we like to refer the money supply as currency held by The public, plus deposits.
Money Supply
References • Engineering Economic Analysis –NPTEL http://nptel.ac.in/courses/112107209/ • Engineering Economics http://www.inzeko.ktu.lt/index.php/EE • Fundamentals of Economics and Management Institutes of Cost Accountants of India www.icmai.in • Modern Economics : Dr. H. L. Ahuja • Principles for Macro-economics- C Rangarajan
Money
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Money

  • 2. Money Definition • A medium of exchange. • With the help of money any exchange of goods and services can take place. • Money is said to be the most liquid asset among all the assets of a man. • It has general acceptability as a means of payment and liquid characteristic. Keynes called this Liquidity preference.
  • 4. Money • Generally money is created by the Central Bank or the Government of a country. • These are legal tender money as there is legal compulsion for their acceptance. • They also called as Cash Money. • Another considerable flow of money is Credit Money—created by the commercial banks by their loan transactions
  • 5. Cash Money Vs Credit Money
  • 6. Money • Money is regarded any object which is generally accepted as: • medium of exchange • unit of account i.e. common measure of value • standard of deferred payment • store of value • transfer of value.
  • 10. Primary Functions • As medium of exchange, money is used as a means of payment. • As money has ready purchasing power, it facilitates in transacting exchange of goods and services with minimum effort and time.
  • 11. Primary Functions • As unit of account, money is treated as common measure of value. • value of all goods and services in exchange can be expressed in terms of money. • Such expression gives rise to price system in which money act as a means of calculating the relative prices as absolute prices of goods and services.
  • 13. Secondary Functions • As standard of deferred payment, money can be used in the settlement of debt and future payments. • Loans are advanced and future contracts are settled in terms of money.
  • 14. Secondary Functions • As store of value, money is hold as an asset in liquid (or cash balance) to use anytime in future. • This is because money has purchasing power which holds commands over goods and services all time – at present and in future. • However use of money as store of value is not without drawbacks. Changes in general price level causes rise and fall in the value of money. When price level rises, value of money falls and vice versa.
  • 15. As Store of Value
  • 16. Secondary Functions • As transfer of value, sale and purchase of movable and immovable assets, paper wealth and physical wealth can be made with the help of money. • Thus, value available in the form of asset can be transferred from one person to another with the use of money.
  • 17. As Transfer of Value
  • 18. Value Of Money • It means Exchange Value. • It implies how much of goods and services can be obtained in-exchange of a unit of money. • Value of money is inverse of price. • When price level increases, the value of money decrease and vice versa.
  • 20. Forms of Money • The total money supply of a country can broadly be classified into two groups — • Cash Money and Credit Money. • It also includes all other financial assets. • The degree of moniness varies widely from asset to asset.
  • 21. Cash Money and Credit Money
  • 22. The Components of Money Supply
  • 23. Forms of Money • In modern monetary transactions, the total stock of money or money supply includes the following: • Metallic money or currency coins • Standard or Full-bodied Coins. • Token coins • Paper Money Or Paper Currency • Credit Or Bank Money
  • 24. Paper Money & Currency Coins
  • 25. Metallic Money Or Currency Coins • It refers to the coins made out of metal like gold, bronze, silver, copper, nickel. • Standard or Full-bodied Coins are those coins whose face value is equal to its intrinsic (metallic) value. • Token coins have intrinsic (metallic) value less than its face value. • They generally are of lower denominations are made of cheap metals like nickel and copper. • Token coins are used for exchange of small value.
  • 26. Metallic Money Or Currency Coins
  • 28. Paper Money Or Paper Currency • Paper money consists of currency notes issued by the State Treasury or the Central bank of the country.
  • 29. Paper Money Or Paper Currency
  • 30. Credit Or Bank Money • Bank demand deposits withdraw-able by issuing cheque has started functioning as money, and cheque are conventionally accepted as a means of payment by the business community in general.
  • 31. Credit Or Bank Money
  • 32. Forms of Money • In short, anything and everything that has served as money is generally recognized and accepted as means of payments. But all can serve a good money. • Good money should poses the attributes of general acceptability, cognizability (capable of being known), portability, divisibility, durability, uniformity, adequacy and stability of value.
  • 33. Good Money Vs Bad Money
  • 34. Legal Tender And Conventional Money • In modern era, currency money and bank money together constitute the total stock of money or money supply. • Currency money (both currency coins and currency notes) is legal tender money or fiat • money and has general acceptability. • Credit money or bank demand deposits are conventional money and lacks general acceptability.
  • 35. Legal Tender And Conventional Money
  • 36. Gresham’s Law • The Law states that bad money drives good money out of circulation. • This is true in-case of bimetallism where two metal standard (gold and silver) operate side by side. In such a case one metal currency drives the other out of circulation. If also means cheap money drives out dear money. • If a country Uses both paper money as well as metal money, people will use the paper money and hold the metal money.
  • 38. Quantity Theory Of Money • Quality theory of Money can be analyzed by two different approaches: (1) Fisher’s Theory (2) Cash Balance Approach
  • 39. Fisher’s Theory • The theory explains the relationship between money supply and price level. • Irving Fisher used an equation [MV=PT] • M stands for total Money Supply. • V means velocity of circulation money which implies the average number of times that a unit of Money changes hands during a particular period. • P is Price level i.e. average price of GNP. • T is Total National output. • Fisher used the equation to show the relationship between money supply and price level as direct and proportional. • The rate of change in money supply (dM/M) is equal to rate of change in P (dP/P). • Graphically the curve showing the relation between M and P will be a 45 degree line passing through the origin.
  • 41. Fisher’s theory is based upon three assumptions • The relation between M and P will be proportional only when there are no changes in the value of V • And T i.e. V and T are constant variables. • (a) Velocity of circulation of money depends on the spending habit of people. Spending habit of • People is, more or less, stable. Hence V will be constant normally. • (b)T or GNP will be constant in situation of full employment when all the available factors of production are fully employed. At less than full employment, more money will lead to more output by utilizing unused factor. Hence P will not rise. • (c) Fisher’s theory assumes that money is demanded for the transaction purposes only. People spend Their entire income instantly for transaction.
  • 42. Cash Balance Approach • It states that it is not total money but that portion of cash balance people spend that influences Price level. • True people hold cash balance in their hands instead of spending the entire amount all at once. • The equation is M=PKT. • Here, M=money supply, P=price level, T=total volume of transaction, K=the demand for money The people want to held in hand.
  • 43. The Quantity Theory by Keynes • Keynes reformulated the Quantity Theory of Money. • In his opinion the quantity of money does not directly affect price level. • A change in the quantity of money may lead to a change in the rate of interest. • With a change in the rate of interest the volume of investment is quite likely to change. • A change in investment will lead to a change in income, output and employment and also a Change in cost of production. • This will lead to the change in prices of goods and services. • The Keynesian version of the Quantity Theory integrates monetary theory with the general theory of value
  • 44. Money Supply • The total stock of money circulating in an economy is the money supply. • The circulating money involves the currency, printed notes, money in the deposit accounts and in The form of other liquid assets. • Monetary policy of a country is concerned with the supply of money. • Narrow money supply is called M1 It consists of notes and coins in circulation and demand deposits with banks and central bank.
  • 46. Money Supply • As they are quickly and easily used for transactions, they are called transactions money. • Broad money supply, M2, consists of M1 Plus other deposits (savings deposits, time deposits, etc.). • There are some differences in the definitions of money supply from country to country. • To give the best definition of money supply, we like to refer the money supply as currency held by The public, plus deposits.
  • 48. References • Engineering Economic Analysis –NPTEL http://nptel.ac.in/courses/112107209/ • Engineering Economics http://www.inzeko.ktu.lt/index.php/EE • Fundamentals of Economics and Management Institutes of Cost Accountants of India www.icmai.in • Modern Economics : Dr. H. L. Ahuja • Principles for Macro-economics- C Rangarajan
  • 49. Money