Functions and Classification of Money

MONEY & BANKING
Sri Krishna Arts and Science College
Department of Commerce
Faculty:Mrs. S. Akhila

Modular Assessment Code
E(Theory –Skill Based)

Agenda
 Learning Objectives
 Expected Outcome
 Key terms
 Summary
 Test your knowledge (MCQ)
 Introduction to next session

Learning Objectives
Money : Functions and Classifications

Expected Outcome
The outcome of this session is to understand the Concept
of Money and its Functions andClassifications.

Functions of money:
Primary functions
1. Medium of exchange
2. Unit of account
Secondary functions
1. Store of value
2. Standard of deferred
payments
3. Easy transfer of value

Primary functions:
Medium of exchange
 Generally acceptable.
 Removed the needs of double
coincidence of wants.
 Remove the difficulties of barter
system.
 Make transaction on time at
any place.
 Works as intermediary between
labor and production to increase
output.
Unit of account
 Standard monetary unit for
measurement of goods services
and assets.
 It is a common denominator
which determines the rate of
exchange between goods and
services.
 It is used to check profit, loss and
liabilities.

Secondary functions:
Store of value: Standard of deferred
payments:
Transfer of
value:
Works as bridge between
present and future value of
wealth.
It is used to meet
unforseen emergency and
to pay debt.
Equally chances of gain
and loss because it is
included bonds securities
commercial papers.
Debt are easily return back
with the same value of money
Make possible contracts for
goods and services against the
bond and securities
Fixed debt contracts eliminate
the gain or loss of creditor and
debtor.
Money has ability
to transfer value
one person to other
person easily at
any place.

Classification of money
Broadly, money can be classified as:
(i) Full Bodied money;
(ii) Representative Full bodied money; and
(iii) Credit money.
Money can be classified on the basis of relationship between the
value of money as money and the value of money as a
commodity.

(i) Full bodied Money:
Any unit of money, whose face value and intrinsic value are equal, is known as
full bodied money, i.e. Money Value = Commodity Value. For example, during
the British period, one rupee coin was made of silver and its value as money
was same as its value as a commodity.
(ii) Representative Full-bodied Money:
It refers to money which is usually made of paper. The
value of representative full-bodied money is much
higher than its value as a commodity. It is accepted as
money as it can be conveniently used for carrying out
transactions.

Two Kinds of Representative Money:
A. Convertible Paper Money:
It refers to the currency notes which are freely convertible into full-bodied
money (gold or silver) at any time at the option of the holder.
B. Inconvertible Paper Money:
It is that kind of paper money which cannot be convertible into full-bodied
money at the option of the holder. However, it circulates and commands value
as its issue is regulated by a responsible government. This money does not
have any backing of standard coins or bullion. Indian one-rupee note is a good
example of inconvertible paper money.

(iii) Credit Money:
Credit money refers to the money whose intrinsic
value (as a commodity) is much lower than its face
value
i.e. Money Value > Commodity Value.
For example, face value of Rs 100 note is Rs 100,
but we would get a much lower value if we sell the
note as a piece of paper.
Credit cards, bank deposits are other examples of
credit money.

The various forms of credit money are:
(a) Token coins:
These refer to small coins of various denominations, which are issued to
facilitate day-to-day requirements of the people. All Indian coins, like those of
Rs 10, 5, 2 or 1, are token coins since their value as money is more than value
of metal contained in them.
(b) Representative Token money:
It is 100% backed and is fully redeemable in some
commodity such as gold or silver. It is generally in the
form of paper and market value of what is actually
offered is less than value printed on paper notes.

(c) Circulating promissory notes issued by central
bank:
These are currency notes issued by Reserve Bank in
India.
 These include all currency notes of denominations like
Rs 1,000, Rs 500, Rs 100, etc.
Each promissory note contains the words, “I promise to
pay the bearer the sum of Rs…………. “, and is signed by
the Governor of India.
The commodity value of a promissory note is much less
than its money value.

(d) Demand Deposits in bank:
Deposits are claims of creditors (depositors) against bank.
These deposits can be withdrawn from the bank or transferred from one person
to another by issuing a cheque.
 Such deposits do not have backing in terms of any bullion (gold or silver).
The commodity value of a cheque is much lower than its money value.
 Demand deposits are very convenient for making transactions of huge amounts
as they remove the risk of carrying large amounts of cash.

Key Terms
Full Bodiedmoney
Representative Full
bodied money
Creditmoney
Mediumof Exchange
Unit of account
Store of value
Paper Money promissory notes
Token coins DemandDeposits

Summary
Unit Of Account-Standard monetary unit for measurement of goods
services and assets.
Medium of Exchange: Works as intermediary between labor and
production to increase output.
Store of Value: Works as bridge between present and future value of
wealth.
Transfer value-Money has ability to transfer value one person to
other person easily at any place.
Representative money -Slip issued against commodities and metals
which was used as money.

Summary
Any unit of money, whose face value and intrinsic value
are equal, is known as full bodied money
It refers to money which is usually made of paper. The
value of representative full-bodied money is much higher
than its value as a commodity .
Convertible Money: It refers to the currency notes which
are freely convertible into full-bodied money (gold or
silver) at any time at the option of the holder.
Inconvertible Paper Money: It is that kind of paper
money which cannot be convertible into full-bodied money
at the option of the holder.

1. Currency notes and coins are called as:?
a) Flat money
b) Legal tenders
c) Fiat money
d) Both b and c
(d) Both b and c
MCQ???????

2. Whichamong the followingis considered to
be the most liquidasset?
a) Gold
b) Money
c) Land
d) Treasury bonds
(b) Money
MCQ???????

3. Anything used as money must be:
a) Fixed in value
b) Fixed in supply
c) Legal tender
d) Readily acceptable
(d) Readily
acceptable
MCQ???????

4. Which is NOT a desirable characteristic of
money?
a) Portable
b) Uniform
c) Easily recognised
d) Easily duplicated
(d) Easily
duplicated
MCQ???????

5. What possess general acceptability?
a) Bank draft
b) Money
c) Bill of exchange
d) Commodity Exchange
(b) Money
MCQ???????

Characteristics of money
Next Hour-

Characteristics of Money?
 Important Characteristics of Money are:
 Durability
 Portability
 Divisibility
 Uniformity
 Limited Supply
 Acceptability

SKASC-Department of Commerce BPS &
CM

Functions and Classification of Money

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