The document discusses money, banking, and government budgets. It defines money and its key functions as a medium of exchange, measure of value, store of value, and standard for deferred payments. It describes different measures of money supply and the role of commercial and central banks. It also explains how commercial banks create credit and how central banks control money supply through various quantitative and qualitative methods. Finally, it outlines the components, receipts, expenditures, and types of deficits in government budgets.

1. MONEY AND BANKING
MONEY- Money is defined as everything which is generally accepted as
a medium of exchange and the same time acts as the measure and
store of value.
Barter system makes the exchange process very inefficient and
difficult.Money overcome the drawbacks of barer system in the
following manners-
OR
FUNCIONS OF MONEY ARE AS FOLLOWS-
OR
IMPORTANCE OF MONEY ARE AS FOLLOWS-
1)MEDIUM OF EXCHANGE- Use of money as a medium of exchange has
removed the problem of double coincidence of wants wherever
transactions takes place with the help of money.
2)MEASURE OF VALUE- In barter system, there was no common
denominations to express their exchange ratio but money acts as a
measuring rod which expresses the value of other commodities, it
becomes easier to compare the relative value of any two commodities.
3)STORE OF VALUE- Under barter system, it was difficult to store
goods for future use but money being an assest can be stored for
future use. Money also has the merit of general acceptability and its
value remains stable as compared to other goods.
4)STANDARD OF DEFERRRED PAYMENTS-Barter system lacks a
suitable standard of deferred payments which makes the credit
transactions difficult . Use of money as deferred payments has
simplified the borrowing and lending transactions and also resulted in
capital formation.
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2. * MONEY SUPPLY- It refers to the total volume of money held by
the public at particular point of time in an economy.
IT IS A STOCK CONCEPT
There r 4 alternative measures of money supply, they r –
4 M1
5 M2
6 M3
7 M4
8 M1-It is the basic measure fo money supply and comprises the
the currency hold by the public, demand deposits and other
deposits held with RBI
9 CURRENCY HOLD BY PUBLIC includes all coins and notes in
circulation
10 DEMAND DEPOSITS includes deposits held by public with
commercial banks.It also includes claims of one banks with
others.
11 OTHER DEPOSITS HELD WITH RBI includes deposits public
financial institutions, international financial institutions, foreign
rental rendering to foreign govt. It does not includes deposits of
Indian govt and commercial banks with RBI.
M2)-It is a broader concept than M1 as it in includes deposits with
POST OFFICE SAVINGS BANKS. As post office deposits are not
drawable by checqes, they r not categorized under ANK SAVINGS
DEPOSITS. Hence the concept of M2 was evolved.
M3)-It is a broader concept than M1, in addition to it also includes
net time deposits with banks.
M4)- THIS measure of money supply not only includes all the items
of M1 but also deposits with post office and savings bank.
*************************** BANKING *************************
BANKS r categorized as commercial n central banks.
A COMERCIAL BANK performs the functions of accepting deposits,
granting loans n making investments with the objective of earning
profit whereas
CENTRAL BANK is an apex body that controls, operates regulates n
directs the entire banking and monetary structure of the country.
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3. 12 CREDIT CREATION / MONEY CREATION BY COMMERCIAL
BANKS -:
It is one of the most important activities of the commercial
banks.Out of the total deposits mobilized ,they r able to create
credit by extending loans and advances. Banks do not keep cent per
cent reserves against the deposits in order to meet the demand of
the depositors.
A BANKER KNOWS TWO THINGS-
1)- All the depositors will not withdraw their money simultaneously.
2)- Borrowers will not withdraw the entire amt in one go.
It means a major part of their deposits is considered as IDLE
RESERVE.
A BANKER CANT AFFORD IDLE RESERVE DUE TO THE 3 REASONS-
13 Bank has to pay interest on such deposits.
14 Bank has to meet administrative expenses (like salaries to the
employees) besides earning of the shareholders.
15 Idle cash is unproductive and don’t bring any income to the
bank.
So the comm. banks needs to extend loans n advances to the needy
persons out of their idle reserves and when a comm. banks grants a
loan , they don’t give the amt in cash instead they open an account in
the name of the borrower n deposits the amt in it.
Banks have the power to create credit many times their deposits.
EXAMPLE- Suppose a depositor MR. VIKASH WATSON has deposited Rs
1000 with bank. Bank doesn’t keep the entite deposit with itself ,
rather lends amt. to a borrower MR. RAHUL GAUD after KEEPING 20%
OF THE DEPOSIT as CASH RESERVE RATIO (CRR) with RBI . Now the
bank can lend Rs 800 to MR. RAHUL GAUD , the bank doesn’t lends
this money by drawing checque or in cash ; it opens an account in the
name of MR. RAHUL GAUD and credits this amt in his acc. Once the
account is opened, it becomes a deposit with the bank which can be
further lent out after keeping 20% of it as reserve with the RBI. It
means now the bank can lend RS 640 to an another borrower say MISS
ISHA and this process will continue until the amt reaches to or nears to
zero.
ONE CAN FIND THAT WITH THE INITIAL DEPOSIT OF RS 1000, BANK
IS ABLE TO CREATE CREDIT WHICH IS MORE THAN RS 1000 .
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4. FUNCTIONS CENTRAL BANK OR RBI :-
1- BANK OF ISSUE—The central bank is legally empowered to
issue all the currency notes except 1 re con (it is issued by the
MINISTERY OF FINANCE )
2- BANKER TO THE GOVT. –It acts as a BANKER , FINANCIAL
ADVISOR and AN AGENT TO THE GOVT.
• AS A BANKER it carries on all the banking business
of the Govt i.e. maintaining current accounts,
accepting deposits, giving loans and advances and
buying and selling of securities on behalf of the
govt.
• AS A FINANCIAL ADVISOR it advices the govt. 4m
time 2 time on financial and monetary matters.
• AS AN AGENT it manages public debt, collect taxes
and other payments on behalf of the govt. n
represent govt. in INTERNATIONAL FINANCIAL
INSTITUTIONS.
3- BANKER AND SUPERVISO TO THE OTHER BANKS- THE
CENTRAL BANK FUNCTIONS IN 3 CAPACITIES-
• AS A CUSTODIAN OF CASH RESERVE—It means
CENTRAL BANK maintains certain portion of the
reserves of the commercial banks (demand and time
deposits)
• AS A LENDER OF LAST RESORT---When comm.
Banks fails to meet their financial requirements 4m
other sources, they can approach to RBI/CENTRAL
BANK which gives loans to them at a bank rate
• CLEARING HOUSE—Since central banks maintains
CASH RESERVE of commercial banks ,hence they
acts as a clearing hose as it clears/settles claims of
one bank against others by making Dr AND Cr
entries in their accounts.
4- CUSTODIAN OF FOREIGN EXCHANGE RESREVE— RBI acts as a
custodian of country’s stock of gold and other foeign
currencies ( like dollars , pounds , yens ). This enables RBI to
eXcercise a good control on country’s foreign exchange.
5- CREDIT CONTROL---Through this function, the central bank
influences the level and course of economic activities in the
country.
THERE R 2 WAYS BY WHICH CREDIT IS CONTROLLED BY RBI---
QUALITATIVE METHOD AND QUANTITATIVE METHOD
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5. A) QUANTATIVE METHOD
OR
HOW RBI CONTROLS MONEY SUPPLY?
------Main qualitative methods r-----
16 BANK RATE—It is the rate of interest charged by RBI
from the comm.. banks. Increase in bank rate means cost
of credit will go up. Increase in bank rate increases the
cost of credit as credit becomes costly. Its opposite
happens when there is a decrease in bank rate.
17 OPEN MARKET OPERATIONS- It refers to purchase and
sale of securities in open market. When RBI offers
securities for sale , it reduces money supply.
18 LEGAL RESERVE REQUIREMENTS—It refers to the min.
%ge of total deposits to be kept by commercial with
themselves and with RBI
WHEN MIN. %ge OF TOTAL DEPOSIT R KEPT BY COMM. WITH
THEMSELVES, IT IS CALLED SATUITORY LIQUIDITY RATIO (SLR)
WHEN MIN. %ge OF TOTAL DEPOSIT R KEPT BY COMM. WITH RBI, IT IS
CALLED CASH RESERVE RATIO (CRR)
B) QUALITATIVE METHODS—THERE R 3 TYPES OF
QUALITATIVE METHODS---
• MARGIN REQUIREMENTS—It is the difference
between the market value of securities offered and
the amt. of loan lent.In the situation of deficit
demand this margini s reduced 2 encourage
borrowings.
• CREDIT RATINING—It refers to the method of fixing
maximum limit on loans and advances given by the
comm.. banks. During deficit demand , it is lifted
and during excess demand it is imposed.
• MORAL SUASION---It refers to the advice (in written
or oral) issued by the central bank to the
commercial banks to regulate the flow of credit.
During the deflation RBI persuades comm.. banks to
expand the credit facilities and during inflation , to
reduce the credit facilities.
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6. GOVERNMENT BUDGET
AND ECONOMY
GOVERNMENT BUDGET IS AN ANNUAL STATEMENT
SHOWING ITEMS WITH ESTIMATES OF RECEIPTS AND PAYMENTS
DURING THE FISCAL YEAR.
GOVERNMENT MAKES BUDGET IN ORDER TO FULFILL THE
FOLLOWING OBJECTIVES------
19 Govt aims to Reduce the inequalities of income and wealth
through taxation and expenditure on social security and welfare.
20 Govt aims to Reallocate resources in accordance with economic
and social priorities of the country.
21 Govt aims to Mobilize resources in such a way that savings,
investments and hence economic growth is promoted.
22 Budget is prepared with the objective of making various
Provisions for managing public enterprises and providing them
financial help.
23 Budget is prepared with the objective to reduce business
Fluctuations and maintain economic stability.
(R2 MPF )
*COMPONENTS OF BUDGET---
IT HAS 2 COMPONENTS---
24 REVENUE BUDGET—It deals with revenue aspects of the budget
and comprises of revenue receipts and revenue
expenditure
25 CAPITAL BUDGET—It deals with capital aspects of the budget
and comprises of capital receipts and capital
expenditure. PAGE 6

7. ON THE BASIS OF RECEIPTS AND EXPENDITURE , GOVT. BUDGET IS
CLASSIFIED AS BUDGET RECEIPTS AND BUDGET
EXPENDITURE
1)BUDGET RECEIPTS—It refers to the estimated money receipts
of the govt from all the sources. It comprises of REVENUE RECEIPTS
AND CAPITAL RECEIPTS.
26 ( A ) REVENUE RECEIPTS—It refers to those receipts
which neither creates any liability nor any reduction
in assets of the govt.
EXAMPLE—Taxes or receipts from the tax liability of an
individual or receipts from the sale shares of a public
enterprise.
REVENUE RECEIPTS ARE REGULAR AND RECURRING IN
NATURE
REVENUE RECEIPTS ARE CLASSIFIED INTO – TAX AND
NON-TAX RECEIPTS.
27 TAX—It is a compulsory payment imposed on people
and companies to meet the expenditure incurred by the
govt. for the common benefit of the people in the
country.
28NON-TAX RECEIPTS--- It refers to the receipts from all
the sources other than tax receipts. EXAMPLE—interest
received on loan given to state govt. and pvt.
Enterprises etc.
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29 ( B ) CAPITAL RECEIPTS—This refers to those receipts
which either creates any liability or any reduction
in the assets of the govt.

8. EXAMPLE-BORROWINGS(IT LEADS TO INCREASE IN
LIABILITY) , SALE OF SHARES OF PUBLIC SECTOR UNITS
(IT LEADS TO REDUCTION IN ASSETS)
CAPITAL RECEIPTS ARE NON-RECURRING IN NATUTRE
CAPITAL RECEIPTS ARE CATEGORISED INTO---
30BORROWINGS
31RECOVERY OF LOANS
32 OTHER RECIPTS—This includes disinvestments and
small savings.
33 BUDGET EXPENDITURE---It refers to the
expenditures of the govt. and comprises of revenue
expenditure and capital expenditure.
34 REVENUE EXPENDITUTE is the exp. Which
neither creates any assests nor any reduction in the
liability.
EXAMPLE- PAYMENT OF SALARIES, PENSIONS,
EXP.ON ADMINISTRATIVE, DEFENCE, AND HEALTH
SERVICES ETC.
35CAPITAL EXPENDITURE refers to those exp. Which
either creates any assests or any reduction in the
liability.
Example- Construction of roads and flyovers,
repayment of borrowings etc.
Page 8
MEASUREMENT OF GOVT. DEFICIT---:::
THERE R 3 TYPES OF DEFICITS--------

9. 36REVENUE DEFICIT
37FISCAL DEFICIT
38PRIMARY DEFICIT
1) REVENUE DEFICIT—
• It is excess of revenue expenditure over
revenue receipts
• Its signifies that the revenue receipts are
less than revenue expenditure and govt has
to make up this deficit through capital
receipts ( i.e. through borrowings or
disinvestments)
• This means either increase in liability or
reduction in assets
• It may also leads to inflationary situations in
an economy as high borrowings increase
the future burden in terms of loan’s amt and
interest payment.
• It is a signal to either reduce fixed
expenditure or increase in revenue.
2) FISCAL DEFICIT---It refers to excess of total
expenditure over total receipts excluding
borrowings. It has to be financed through
borrowing.
Page 9
IMPLICATIONS OF FISCAL DEFICIT-----:::
39It leads to debt trap. It implies total borrowing which
creates the problem of repayment of loans with

10. interest. Interest payment raises revenue expenditure
which leads to revenue deficit. IT CREATES A VISCOUS
CIRCLE.
40In order to meet the deficit requirements, more
currency is printed by RBI which increases the money
circulation and money supply and hence leading to
inflation
41It increases of dependence of govt. on other countries.
42It hampers economic growth.
3)PRIMARY DEFICIT---It is fiscal deficit minus (-) interest
payment.
It indicates how much govt borrowings r going to meet
the expenses other than the interest payment. The
difference between fiscal and primary deficit is interest
payment on the borrowings made in the past.
Zero or no primary deficit indicates that interest
commitment has forged the govt. to borrow.
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ADVISORY

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