SHYAM COACHING & COMPUTER CENTRE

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By ShyamThakur Sir
MONEY
Q-1
What do you mean by Barter Exchange? Can it work when there is ‘Double Coincidence of
Wants’ give reason?
Solution
Barter system was a system of exchange where goods were exchanged for goods and there was
no common medium of exchange in the economy. Under this system, people exchanged
commodities for commodities to satisfy their wants. Like a person who had 1 kg of rice and
wanted 1 kg of wheat could exchange the rice with another person who had 1 kg of wheat and
wanted 1 kg of rice instead
Double Coincidence of Wants’ give reason
Under barter system, goods were exchanged for goods.

In other words, a barter economy signifies the exchange of goods through the medium of goods.
However, this system created many difficulties. The most important difficulty was the lack of
double coincidence of wants.
This means barter transactions can only be possible when two persons desiring exchange of
commodities should have such commodities that are mutually demanded by each other.
For example,
if Riya wants cloth, which Mansvi has, then Riya should have a commodity that Mansvi wants
in exchange for the cloth.
In the absence of such coincidence of wants, there will be no exchange. However, it is very
difficult to find a person with whom there exists a coincidence of wants.

Money acts as a medium of exchange and the consumer can exchange it for purchase of any
good or service that he requires, thus solving the problem of double coincidence of wants.
Q.2-
List the Characteristics of Barter Exchange?
Solution
Characteristics of Barter System

• Mutual Benefit: In the olden days when society was not so developed and money was not
invented. The barter system acted as a classical arrangement through which people can get what
they need, by offering them some other commodity of their need. In this way, the barter system
mutually benefits the participants.
• Reciprocal: In a barter system, the exchange is reciprocal, which means it is negotiated,
wherein the participant get the commodity they need in place of the commodity, they are offering
in exchange.
• Absence of Money: In this type of trade, no money is involved in the transaction. The
barter system existed when the economy was cashless, as well as there was no other substitute
mode for payment.

• Informal Presence: At present barter system only exists in an informal manner and not as
an official exchange method.
• Bilateral or Multilateral Trade: The trade can take place between two parties or among
multiple parties who are able to supply something which the other party is in need of.
Q.3
List the limitations of Barter Exchange?
Solution
Limitations of the Barter system

Though barter exchange is simple and immediate, it has certain limitations also, which are
discussed hereunder:
1. Mutual Coincidence of Wants: This is one of the most common problems faced by people in
barter exchange. Mutual coincidence pr double coincidence of wants means that if one party
wants to exchange a particular commodity with another party, then it is not necessary that the
latter is also willing to exchange the commodity which the former party is looking for. so, the
wants of two people must coincide.
For Example: Suppose Mr Y wants a pair of shoes and he has 5 kg of wheat to offer as
consideration. In that case, he has to look for such a person who wants 5 kg of wheat and has a
pair of shoes to offer in return.

2. Common Measure of Value: Lack of a common measure of value, is another major issue in
barter exchange. So, in the absence of any common unit of measurement, people find it difficult
to estimate the true and exact value of the commodity. Hence, the commodity is measured in
terms of the commodity only.

For example, there are two parties a fruit seller and a carpenter, who want to exchange fruits
against the chair. So, what they need to decide is what should be the proportion of the two
commodities which are to be exchanged, i.e. how many dozens of fruits are required to be
exchanged for a chair? Basically, these are isolated transactions and in the absence of any
common unit of measurement, the exchange is possible only in an arbitrary manner.
3. Divisibility of Goods: Some commodities cannot be divided into small parts/pieces, without
any reduction in their actual value. This problem mainly arises when the commodity which is to
be exchanged is livestock. All the commodities do not possess the same value.
For example, A person wants to exchange his horse and wants 5 kg of rice. Suppose 1 horse is
equal to 100 kg of rice. In such a case, it is not possible for him to divide the horse into pieces to
get the rice. And if he gives the horse against 5 kg rice, he is going to lose. So, it makes the
barter system inconvenient.

4. Difficulty in storing value: Value or wealth can only be stored in the form of commodities,
such as food grains, cattle, fruits, vegetables, etc. which is not possible due to perishability,
degradation in quality, space for storage and expenses on goods.
For example: Suppose a person provides services to another person for which the former
received 1 quintal wheat and 4 goats. And the goats consumed all the wheat received by him.
And after some time the goats died because of a disease. Hence, storage in the form of
commodities is not at all possible.
5. Difficulty in future payment: In the absence of any satisfactory unit of measurement, it is a bit
difficult to enter in any contract which involves future payment, as the payments are to be
specified in terms of goods and services. However, there is the possibility of disagreement as to
the quality of good, a particular kind of good and change in the value of the good.
For example, One party provided services to another party, on an agreement that the latter would
be provided 10 kg of rice for that, after one year. The quality and value of rice might change in
future. So, deferred payment is not at all possible.
Q-4
What is meant by money supply? Discuss in brief the various constituents of money supply.

Solution
Money supply refers to the total stock of money of all types ( currency as well as demand
deposits) held by the people of a country at a given point of time.
Money supply is measured in several ways which includes M1, M2, M3 and M4 measurement
of money supply. Every measurement has it own definition with different components varying
from most liquid to most rigid form.
1. M1= C+ DD+ OD
where,
C: It refers to currency held by public in terms of coins and paper notes.
DD: It refers demand deposits of the people with the commercial bank.

OD: These includes other deposits with public financial institution, foreign central banks and
international financial institution.
2. M2 = M1+ deposits with the post office saving bank account
3. M3 = M1 + net time deposits with the commercial banks

4. M4 = M3 + Total deposits with post offices other than in the form of national saving
certificate
Q.5
Explain “Drawbacks of Barter System

Solution
Drawbacks of Barter System
• Lack of Common Measure of Value: One of the disadvantages of the Barter system is
having no common unit to measure the worth of goods and services. Hence, the problem arises
with the proportion of goods to be shared.
• Lack of Double Coincidence of Wants: It is unlikely that two people want to exchange
their products or services at the same time. If one needs a product, it is possible that the other
person might not have the demand for the product offered in return.
• Problems in Storing Wealth: Unlike money, it is difficult to store goods and services for a
longer duration of time. Products must be consumed within a specific time frame. Hence, there is
difficulty in storing wealth in the Barter system.
• Division of Certain Products is not possible: A trader cannot divide certain goods such as
shoes, animals, cupboards, etc in half. Therefore, coming at a common rate of exchange becomes
difficult.

• Lack of Specialization: In the Barter system, a high specialization is difficult to achieve.

• Difficulty in Making Future Payments: Having a debt contract for future payments is
difficult to make in the Barter System.
Q.6
Write the functions of money?
Solution
Functions of money can be broadly categorized into two parts –

1. Primary functions of money

Primary functions can be further divided into two subcategories.
1. Money as an Exchange Medium:
One of the primary functions of money is as a medium of exchange as it can be used for any or
all transactions wherein goods or services are purchased or sold. Therefore, one can buy or sell
products in exchange for money.
2. A measure of Value:
Money can be treated as the parameter of measuring the value of a product or service. To put it
simply, the value of every product or service can be expressed in monetary form. The money
also follows a standard and is accepted worldwide even though the currency does differ from one
country to another.
For instance, the value of each product is determined in monetary terms. The value of 1 egg is
supposedly Rs.5 in India, and the value of a pack of bread is around Rs.15. So, money is a
measure of the value of all products (and services) and is the amount that is required to be
paid/received while transacting. Therefore, it is one of the essential four functions of money.
Subsequently, these primary and secondary functions of money are some important uses of
money in any economic market.
2. Secondary Functions of Money

The secondary function can be further segregated into three parts as mentioned below –
• Store of Value
Being crucial functions of money, it can be stored or conserved. One can store it for future
purposes, and it is economical as well as convenient to store money.

• Standard of Deferred Payments

Money can be used conveniently for deferred payments which need to be paid by individuals. It
has become the standard for payments made presently or in the future. For instance, if someone
borrows a certain amount from another individual, they need to repay the amount with interest.
With money in purview, it is convenient to pay the interest or make deferred payments.
This has led to the popularity of lending and borrowing transactions and has contributed a big
part to the formation of financial institutions.
• Transfer of Value
The utility of money stretches to the transfer of value as it can be used to purchase goods not
only within the country but beyond the domestic line. One can sell or purchase goods in the
domestic or international market with money as a standard tool.
Therefore, the availability of money in the market has contributed to stability and liquidity in the
market and helps form essential functions of money markets.
Q.7
What are the contingent functions of money?
Solution
Money refers to a common medium of exchange that is issued under the law of government and
acts as a legal tender for the whole country. The contingent functions of money includes the
following :-

1. Distribution of national income: Money helps in optimum distribution of national income

among different factors of production by generating factor incomes like rent, interest, wage and
profit.
2. Basis of credit creation: Credit creation by commercial banks is not possible without money.
Money as a store of value has encouraged savings by people in the form of demand deposits in
the banks which are used by the commercial banks to create credit.
3. Maximization of satisfaction: Money helps the consumers and producers in maximizing their
satisfaction by measuring the value of everything in terms of money. A consumer derives
maximum satisfaction by equating the price (expressed in terms of money) of each commodity
with its marginal utility (satisfaction). Similarly, a producer maximizes his satisfaction (profit)
by equating the marginal productivity of a factor with price of such factor.
4. Increases productivity of assets: Money increases the productivity of capital as it is the most
liquid asset and can be put to alternative uses. Due to liquidity of money, capital can be easily
transferred from less productive uses to more productive uses.

Q.8
Write Short Notes on Credit or Bank Money.
Solution:-Any future monetary claim against an individual that can be used to buy goods and
services is known as Credit money or bank money. There are many forms of credit money, such
as bonds, money market accounts etc. Any form of financial instrument that matures after a
certain period of time or cannot be repaid immediately is considered as credit money. Cheques
or Bank money are superior to other forms of money in that they are convenient for mailing, for
paying exact sums, for providing receipts in the form of counterfoils and on account of being
safe against being stolen or misplaced. Therefore, the bank money has become quantitatively the
most important in all economic systems. In modern times, bank money has superseded all types
of money.