MONEY

AND
SUPPLY OF
MONEY
MEANING

Money it can be defined as anything

which can be used as a medium of
exchange and at the same time act as
a measure of value and store of value.
 Barter System

It refers to the system of exchange where

goods and services were exchanged
directly for other goods and services.
It also known as C - C economy
Difficulties of barter system

1) Lack of double coincidence of wants

2) Lack of common measure of value
3) Problem of future payments
4) Lack of store of value
5) Lack of divisibility
Forms of money

1) Fiat Money: It is a type of money which

is issued by authority of government

2) Fiduciary money : It is that money

which is accepted as a medium of
exchange because of the trust between
the payer and the payee.
3) Full bodied money: It refers to money
in terms of coins whose commodity value
is equal to the money value as and when
these are issued.

4) Credit money: It refers to that money

of which money value is more than
commodity value

5) Bank Money : It refers to the demand

deposits with the banks.
Legal tender money:
Money which has legal sanction behind it
and accepted as a means of payment is
known as legal tender money. It is of two
types :
1) Limited Legal Tender money : it is that
money which no person can be forced to
accept beyond a certain maximum limit.
Like Coins

2) Unlimited Legal Tender money: It is

that money which is accepted by the
people to an unlimited extent. Currency
notes.
Supply of money:
It is defined as the total stock of all the
forms of money e which are held by the
public at any particular point of time.

Supply of money is a stock concept.

Supply of money e does not include:

1) Stock of money held by the government
2) Stock of money held by the banking
system of a country.
Measurement of money supply

M1 = C + DD + OD
Whereas:
C = Currency with the public
DD = Demand deposits with commercial banks
OD = Other deposits with RBI
(i)DD with RBI of public financial
institutions like NABARD.
(ii)Demand Deposits with RBI OF
Foreign Central Banks and Governments.
(iii) Demand Deposits of
International Financial Institutions (Like
IMF and World Bank).
M2 = M1+Saving Deposits with Post
Office Saving Bank.

M3 = M1+ Net time Deposits with Banks

M4 = M3 + Total Deposits with Post Office

Saving Bank (Excluding NSC)
 FUNCTIONS OF MONEY
(i) Primary Functions
(i) Medium of Exchange
(ii) Measure of Value or Money as a
Unit of Account
(ii) Secondary Functions
(i) Standard of Deferred Payments
(ii) Store of Value
(iii) Transfer of Value
(iii) Contingent Functions
(i) Measurement and Distribution of
National Income
(ii) Maximisation of Satisfactions
(iii) Basis of Credit
 (iv) Productivity of Capital

1. Static Functions
Static Functions are those which help the
operation of the economy but these do not
create movement in the economy.

2. Dynamic Functions
The Dynamic Functions are those which
actively influence the economic system through
its impact on price level, interest rate, volume of
production, distribution of wealth and income,
etc.