#moneyandbanking #bartersystem #CBSE #class12 #kishanlalsharma

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Kishan Lal Sharma(BBA,MBA)MLZS

2. Money: Money is the most often used means of exchange. It is an economic unit that
serves as a universally accepted means of exchange in a transactional economy. Money
offers the benefit of lowering transaction costs, particularly the double coincidence of
wants. There can be no exchange of commodities and thus no role for money in an
economy consisting of only one person.
Barter Exchange: It is a trade in which one product or service is exchanged for
another. It is the oldest form of commerce. Individuals and businesses exchange goods
and services based on equivalent prices and good estimates.
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Kishan Lal Sharma(BBA,MBA)MLZS

3. Functions of Money: The functions of money are broadly classified as
1. Primary functions.
 A mode of exchange.
 A common measure of value or a common unit of value.
2. Secondary functions:
 Value storage.
 Value transfer.
 Deferred payment standard.
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Kishan Lal Sharma(BBA,MBA)MLZS

4. Demand of Money:
It is referred to as an individual's liquidity preference, which is the decision of
holding money in liquid form, i.e., cash, in order to earn interest or as a
precaution.
Money demand is impacted by a number of factors such as inflation, income,
interest rates, and future uncertainty. The two important motives for the demand
of money: transaction, and speculative motives, are commonly used to describe
how these elements affect money demand.
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Kishan Lal Sharma(BBA,MBA)MLZS

5. Transaction Motive : (लेन-देन का मकसद)
The drive to hold cash amounts is referred to as the transaction's motive. The
fact that most transactions involve an exchange of money is the transaction
motive for demanding money. Money will be demanded because it is necessary
to have money available for transactions. The aggregate quantity of
transactions in an economy tends to increase as income grows. As a result, as
income or GDP rises, so does the demand for money in transactions.
Speculative Motive: (सट्टा उद्देश्य)
It refers to funds retained by investors in order to capitalise on potential
investment opportunities in the economy. When retaining money is thought to
be less hazardous than lending it or investing it in another asset, the
speculative motive for demanding money emerges.
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Kishan Lal Sharma(BBA,MBA)MLZS

6. Aggregate Money Demand: (क
ु ल धन की माांग) In an economy, the
entire demand for money is made up of transaction demand and speculative
demand. The former is proportionate to real GDP and the price level, whereas
the latter is inversely related to the market interest rate.
Where,
Md= Money Demand
Md= Money Demand
MdT= Transaction Demand
MTd= Transaction Demand
MdS= Speculative Money Demand
Fiat money: (वैध मुद्रा ) It is the currency that a government declares to be
legal tender but is not backed by a physical asset. The value of fiat money is
calculated by the link between supply and demand rather than the worth of the
commodity used to make the money.
Md = MdT+ MdsMd = MTd +
Msd
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Kishan Lal Sharma(BBA,MBA)MLZS

7.  Supply of Money: It refers to the total money held by the public at a
particular point in time in an economy. The supply of money does not include the
cash balances held by the national and state governments, as well as the stock
of money held by the country's banking system, because these are not in active
circulation in the country.
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Kishan Lal Sharma(BBA,MBA)MLZS

8.  Measures of Money Supply:
 M1M1: It is the first and basic measure of the money supply. It includes currency held by
the public, demand deposits of commercial banks, and other deposits with the Reserve
Bank of India (RBI).
 M1= Currency and coins with public( C) + Demand deposits of the public with the
banks(DD) + Other deposits (OD) M1= Currency and coins with public( C) + Demand
deposits of the public with the banks(DD) + Other deposits (OD)
 ii. M2M2: It is also known as narrow money along with M1. It includes Savings deposits
with Post Office saving banks.
 M2=M1+ Savings deposits with Post Office saving banks M2=M1+ Savings deposits with
Post Office saving banks
 iii. M3M3: It also includes time deposits with a commercial bank and is known as broad
money.
 M3=M1+ Net time deposits with commercial banks
 iv. M4M4: It includes the total deposits excluding National Saving Certificates and is also
known as broad money along with M3.
 M4=M3+ Total post office deposits excluding National Saving Certificates( NSC)
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Kishan Lal Sharma(BBA,MBA)MLZS

9. Banking Systems:
 Commercial Bank: A commercial bank is a type of financial organization
that handles all transactions involving the deposit and withdrawal of money for
the public, as well as the provision of loans for investment purposes and other
similar activities. These banks are profit-making enterprises that conduct
business only for the purpose of making a profit. State Bank of India, Canara
Bank are some examples.
 Central Bank: In the banking system, the central bank is recognized as the
highest financial institution. It is seen as an essential component of a country's
economic and financial system. The central bank is an independent authority in
charge of supervising, regulating, and stabilizing the country's monetary and
banking structures.
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Kishan Lal Sharma(BBA,MBA)MLZS

10. Money Creation by Banks:
If the value of any of its constituents, such as
 CU,
 DD, or
 Time Deposits, changes, the money supply will alter.
The public's preference for maintaining cash balances as opposed to bank
deposits has an impact on the money supply.
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Kishan Lal Sharma(BBA,MBA)MLZS

11.  The following major ratios summaries these influences on the money supply.
1. The Currency Deposit Ratio: The currency deposit ratio (CDR)
depicts the amount of currency held by individuals as a percentage of total
deposits. For instance, cdr rises over the holiday season as people convert
deposits to cash balances in order to cover extra expenses.
CDR = CU/DD
2. The Reserve Deposit Ratio: Banks keep a portion of the money
customers keep in their bank accounts as reserve money and lend the rest to
various investment initiatives. Reserve money is made up of two components:
vault cash in banks and commercial bank deposits with the RBI. Banks use this
reserve to meet account holders’ need for cash. The reserve deposit ratio (rdr) is
the percentage of total deposits that commercial banks retain as reserves.
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Kishan Lal Sharma(BBA,MBA)MLZS

12.  Measures to bring forth a healthy Reserve deposit ratio:
I. Qualitative Measures
1. Cash Reserve Ratio (CRR):
It is a portion of a bank's total deposits that the Reserve Bank of India requires to
be kept with the latter as liquid cash reserves. When computing the base rate,
one of the reference rates is the cash reserve ratio. The base rate is the lowest
lending rate at which a bank is not permitted to lend money. The Reserve Bank of
India sets the base rate.The rate is fixed, ensuring openness in the credit market
when it comes to borrowing and lending.
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Kishan Lal Sharma(BBA,MBA)MLZS

13. 2. Statutory Liquidity Ratio (SLR): It is essentially the reserve
requirement that banks must maintain before extending credit to customers.
Aside from the Cash Reserve Ratio (CRR), banks are required to keep a certain
percentage of their net demand and time liabilities in liquid assets such as cash,
gold, and unencumbered securities..
3. Bank Rate: A bank rate is the interest rate charged by a nation’s central
bank to its domestic banks in order for them to borrow money. The interest rates
charged by central banks are meant to stabilize the economy. The lending rates
of commercial banks are affected by bank rates. Higher bank rates will result in
higher bank lending rates. The central bank might raise the bank rate in order to
reduce liquidity, and vice versa.
4. High Powered Money: It is the money created by the RBI and the
government, in which the public holds the currency, and the banks hold the cash
reserves.
High-powered money is the sum of commercial bank reserves and currency,
which denotes the notes and coins held by the general public. The increase of
bank deposits and the creation of a money supply are both based on high-
powered money.
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Kishan Lal Sharma(BBA,MBA)MLZS

14. II. Qualitative Measures
1. Open Market Operation: It refers to the central bank's selling and purchase
of securities on the open market to and from commercial banks or the general public. The
open market operation is one of the quantitative techniques used by the Reserve Bank of
India to smooth out liquidity conditions throughout the year and reduce the impact on
interest and inflation rates.
2. Bank Rate Policy: The term "bank rate policy" refers to the central bank's
manipulation of the discount rate in order to influence the economy's credit condition. The
bank rate policy is based on the idea that changes in the bank rate are usually followed by
comparable changes in the money market rate, making credit more expensive or less
expensive and impacting demand and supply.
3. Sterilization by RBI: Sterilizing is the RBI's market-based technique for
neutralizing a portion or all of the monetary impact of foreign inflows. Sterilizing is the
RBI's market-based technique for neutralizing a portion or all of the monetary impact of
foreign inflows. The sterilizing procedure is used to alter the value of one local currency
compared to another and is launched in the foreign exchange market. Sterilization in the
traditional sense entails central banks buying and selling on open markets.
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Kishan Lal Sharma(BBA,MBA)MLZS

15. Thank You !
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Kishan Lal Sharma(BBA,MBA)MLZS