Money (Macro-economics)

1. Money
(Macro-economics)

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.

3. Money

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.

7. Money

8. Functions Of Money

9. Money

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.

12. Unit Of Account

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.

19. Exchange Value

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

27. Standard or Full-bodied 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.

37. Gresham’s Law

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.

40. Quantity Theory Of Money

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.

45. Money Supply

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.

47. Money Supply

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

50. Thanks…