Banking and Financial Awareness

MONEY AND MONEY SUPPLY

Barter system of Exchange

Barter system of exchange is the system in which commodities are
exchanged for commodities. This is also called commodity for commodity
exchange economy or C-C economy.
Difficulties of Barter System of Exchange
(i) It requires double coincidence of wants, which is a rare occurrence.
(ii) It lacks a common unit of exchange.
(ii) It lacks the system of future payments or deferred payments.
(iii) It lacks the system of storage and transfer of value.
Money
A thing commonly accepted as a medium of exchange.
Functions of Money
(a) Primary Functions:
(i) It serves as a medium of exchange,
(ii) It is a standard unit of value.
(b) Secondary Functions:
(i) It is standard of deferred payments,
(ii) It is a store of value.
(iii) It facilitates transfer of value.
l Fiat Money: It refers to money backed with order (authority) of the
government.
l Fiduciary Money: It refers to money backed with mutual trust
between the payer and the payee.
l Full-Bodied Money: Money value = commodity value.
l Credit Money: Money value > Commodity value.
l Supply of Money: It is a stock concept. It refers to the stock of
money available with the public/people at a point of time.
l The stock of money with the money-issuing authorities (the
government and the banking system of the country) is not considered
as a part of money supply.
l M1, M2, M3 and M4 are the four measures of money supply in India.
l M1 = Currency with Public + Demand Deposits + Other Deposits
with the Reserve Bank
 l M2 = M1 + Deposits with Post Office Savings Bank Accounts
l M3 = M1 + Time Deposits with Banks
l M4 = M3 + Total Deposits with Post Offices (excluding National
Savings Certificate)
l M4 measure of money supply is the most comprehensive but the
least liquid.
l M1 measure of money supply is the most liquid but the least
comprehensive.
l High-Powered Money: It includes currency (notes + coins) with
the public and cash reserves with the banks.

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