3. Money is an officially
issued legal tender
generally consisting of
notes and coin, and is
the circulating
medium of exchange
as defined by a
government.
What is Money?
4. Function of Money
• A Medium of Exchange
• A Means of Storing Wealth
• A Means of Evaluation
• A Means of Establishing Value of
Future Claims and Payments.
5. Exchange Of Money
Payment of goods and
services and as a means of
payment of labor and
other factor services
6. Storing Wealth
People need a means whereby labor
can be used to purchase goods and
services in future. People need to be
able to store their money; the want a
means of saving.
7. Means of Evaluation
Money allows the value of goods,
services or assets to be compared. The
value of goods is expressed in terms of
prices, and prices are expressed in
money terms.
8. Establishing The Value of Future Claims &
Payments
People often want to agree today
the price of some future payment.
Money prices are the most
convenient means of measuring
future claims.
9. Components of Money
M1: Cash circulation with the public +
overnight deposit
M2: M1+ Deposits with agreed maturity
M3: M2+ Repos+ Money market funds &
paper+ Debt securities
M4: Retail deposit & cash in M4+ Deposit in
banks + Certificate of deposit
10. The Demand for Money
• The Transactional Motive
• The Precautionary Motive
• The Asset Motive
11. The Supply For Money
• The Monetary Base (or ‘High-powered
money’)- consists of cash (notes and coin) in
circulation outside the central bank.
• Broad Money- Which in most cases includes
both time and sight deposits, retail and
wholesale deposits, and bank and building
society (savings institution) deposits.
12. The Relationship Between Money Supply &
Rate of Interest
Exogenous money supply:
Money supply that does
not depend on the
demand for money but is
set by the
authorities.
13. Endogenous money supply:
Money supply that is
determined (at least in part)
by the demand for money.
The Relationship Between Money Supply &
Rate of Interest
14. Barter is a system of exchange where
goods or services are directly
exchanged for other goods or services
without using a medium of exchange.
What is Barter System?
15. Difficulties in Barter System
1. Double Coincidence of Wants,
2. Lack of a Standard Unit of Account,
3. Impossibility of Subdivision of Goods,
4. Lack of Information,
5. Production of Large and Very Costly Goods not Feasible.
16. Method of Credit Control
• Quantitative Method-
i) Bank Rate Policy,
ii) Open Market Operation,
iii) Changing the Cash Reserve Ratio.
• Qualitative Method/ Selective Method.
17. Method of Credit Control:
Quantitative Method
Bank Rate Policy: Bank rate is minimum rate at which
central bank of a country provides loans to the
commercial bank of the country.
Limitations of Bank Rate Policy:
1. If the commercial banks have considerable reserves,
2. If businessman & investors reduce their borrowings.
18. Open Market Operation: Open market operation means the
purchase and sales of securities by the central bank.
Limitations of the Open Market Operation:
1. Cash reserve will decrease when the central bank sells securities.
2. The percentage of cash credit can be vary within quite limits.
3. Cheap money rate may not attract borrowers.
4. The velocity of bank deposits is rarely constant.
Method of Credit Control:
Quantitative Method
19. Changing the cash reserve Ratio (CRR):
It means by law, banks have to keep a certain
amount of cash money with themselves as
reserves against deposits.
Method of Credit Control:
Quantitative Method
20. Method of Credit Control
Qualitative or Selective Method
The qualitative or the selective methods
objective is mainly to control and regulate the
flow of credit into particular industries or
businesses.
21. Role of Monetary Policy For Promoting Economic Growth
Economic growth can be speeded up by accelerating the rate of savings and
investment in the economy. This requires the following steps:
a) Increase in the aggregate rate of savings in the economy,
b) Mobilization of these savings so that are made available for the purpose of
investment and production,
c) Increase the rate of investment,
d) Allocation of investment funds for productive purposes and priority sectors of
the economy.
22. Role of Monetary Policy For Promoting Economic Growth
Requirements of Economic growth:
a) Monetary Policy and Savings,
b) Monetary Policy and Investment,
i)Cost of Credit
ii)Monetary Policy and Public Investment
iii)Monetary Policy and Private Investment
c) Allocation of Investment Funds
23. Liquidity Trap
The liquidity trap is the
situation in which
prevailing interest rates
are low and savings rates
are high, making monetary
policy ineffective.
24. Quantity Theory of Money
Factors of Quantity Theory of Money:
a)The Volume of Trade or Transaction
b)The Quantity of Money
c) Velocity of Circulation of Money
25. The general level of prices is determined, that
is, why at sometimes the general level of
prices rises and sometimes it declines.
Sometime back it was believed by the
economists that the quantity of money in the
economy is the prime cause of fluctuations in
the price level.
Quantity Theory of Money:
Income Version
26. The total volume of money in a country, is
equal to the total value of all goods and
services. The total supply of money is
obtained by
=
Quantity of money in circulation (M)
X Velocity in circulation (V)or M x V=Total
supply of money
Fisher’s Equation of Exchange
27. Equilibrium in the money market is
where the demand for
money (L) is equal to the supply of
money (Ms). This equilibrium is
achieved through changes in the rate of
interest.
Equilibrium in the Money Market
28. When the supply of money in an economy, the
nominal interest rate changes as a result.
Increases the money supply, there is a surplus of
money at the prevailing interest rate. Decreases
the money supply, there is a shortage of money at
the prevailing interest rate.
Effect of Increase in Money Supply on the Rate of Interest
