Meaning of Money:

Anything that is generally acceptable as a means of exchange & at the same time, acts as a
measure & store of value.

Kinds of money
1. Currency – coins and paper currency component
2. Deposit money component

Coins are token money: Token money is the money the face value of which is more
than its intrinsic (metallic value)

 Currency notes: central bank issued currency that was fully convertible into
gold. It was, therefore, known as convertible money.

 Inconvertible paper money: Acts as money because people has confidence in it

as it is issued on the order (fiat) of the government. it is called fiat money
because government has declared it a legal tender.

 Deposit money or bank money: Refers to the deposits held with the bank on the
basis of which cheques could be drawn.

 Legal tender money: Legal tender money may be limited or unlimited legal
tender. Limited legal tender is the money which is accepted as legal tender only
up to certain maximum amount. It cannot be forced upon the people beyond that
limit.

 Unlimited legal tender money: On the other hand, is the money which a person
has to accept without any maximum limit.
 Functions Of Money

Primary functions:

1. Medium of exchange: The most important function of money is that it

serves as a medium of exchange. Money commands general purchasing
power to purchase goods and services which people want.

2. Measure of value: The second important function of money is that it acts as

a common ‘measure of value ‘or unit of account. Money serves as a unit of
measurement in terms of which the values of all goods and services are
measured and expressed.

Secondary Functions:

1 Standard of Deferred Payments: Money serves as a standard of deferred

payment. Acting as a standard of deferred payments means that a payment to
be made in future can be stated in terms of money.

2- Store of value: Money also serves as a store of value, i.e., people can keep
their wealth in the form of money.

3- Transfer of value: Money also serves as a means to transfer value. This

function of money arises from the general acceptability of money as a
medium of exchange. Money help us to transfer value from one person to
another.

Contingent functions:

1- Maximisation of utility: A relation consumer wants to maximise this utility

(or satisfaction) while purchasing various goods and services.

2- Employment of factor inputs: Every producer aims at maximisation of his

profits while employing various factors of production. rates of remuneration
such as wage rate are expressed in money terms, it is money which helps the
 producer to arrive at decisions with regard to the number of units of a factor
of production to be employed.

3- Distribution of national income: Production is the outcome of combination

and collective efforts of various factors of production. Production of goods
and services is rewarded not it terms of goods & services, but in money
terms.

4- Basis of credit system: It is money which provides the basis of the entire
credit system. without the existence of money, important credit instruments
like cheques, bills of exchange, etc. cannot be used. money is at the back of
all credit.

Supply of money:
Supply of money refers to the stock of money held by the public at a point of
time as a means of payments and store of value.

1. Money supply refers to the money held by the public in a country. The
term public refers here to all economic units, including private
individuals, business firms and institution operating in the economy.
Money supply refers to money in circulation, but the money held by
the government in its treasury, central bank and commercial bank in
their reserves is not in circulation.

2. Money supply is a stock concept and therefore, it is measured at a

point of time.

Components of money supply:

1. Currency: It includes both paper currency and coins issued by the

government and the central bank of the country.

2. Deposit money: It refers to the demand deposits held by the public

with commercial bank on the basis of which cheques can be drawn.
Demand deposits held by the public are also called bank money.
 M1 = Currency held by public + Demand deposits held by public
with the commercial banks.

M2 = Currency held by public + demand deposits held by public

with the commercial bank + Time deposits (including saving
deposits) held by public with the commercial bank.

Measure of money supply in India:

M1 = Currency notes and coins with the public (C) + Demand deposits of
the people with commercial bank (DD) + other deposits with the RBI
(OD) such as deposit of public financial institution, deposits of foreign
central banks and foreign governments an international financial
institution.

Thus, M2 = C + DD + OD

M2 = M1 + savings deposits with post office saving banks (SD)

Thus, M2 = M1 + SD

M3 = M1 = Time deposits with commercial bank (TD)

Thus, M3 = M1 + TD

M4 = M3 + total deposits with the post office saving organisation

excluding national saving certificates (TDP)

Thus, M4 = M3 + TDP

High Powered Money- It consists of currency held by public & the banks &
deposits held by the banks as reserves with the central bank.

M0= Currency in Circulation + Currency deposits of the commercial

bank with RBI + Other deposits with RBI