BUSINESS ECONOMICS PRESENTATION

ON MONEY AND ITS MULTIPLIER

Submitted to: Submitted By :

Dr. Priyanka Yadav Kavish khandelwal
Himanshu Bagul
Himanshu Damwani
Topics included in presentation :
 1. DEFINITION OF MONEY
 2. FUNCTIONS OF MONEY
 3. IMPORTANCE OF MONEY
 4. MEASURES OF MONEY SUPPLY
 5. COMPONENTS OF MONEY
SUPPLY
 6. CONCEPT AND WORKING OF
MULTIPLIER
 1. DEFINITION OF MONEY :
• A medium of exchange that is centralized, generally
accepted, recognized, and facilitates transactions of goods
and services, is known as money. Money is a medium of
exchange for various goods and services in an economy.

• The money system varies with the governments and

countries.

• Different countries have different currencies.

• The central authority is responsible for monitoring the

monetary system.

• There are many forms of money, and cryptocurrency is

the newest addition to the forms of money and can be
internationally exchanged.
2. FUNCTION OF MONEY :
Primary Functions :
 Under primary function, money is thought of as a
passive tool, which performs the following functions:

• Medium of Exchange: As a medium of exchange

money can be used as a means which can be paid as a
consideration to settle the transaction. In this way,
money facilitates the process of exchange, by
separating the transaction into two parts, i.e. sale and
purchase, which removed the inconvenience of double
coincidence of wants.
 • Unit of Value: Money helps in measuring the value of
goods and services, in price. So, it has significantly
eliminated the confusion that pops up due to the
measurement of the value of good or services in
relation to other goods and services.
 Secondary Functions :
 Under secondary function, money is thought of as a dynamic tool, which
carries out the following functions:

• Standard of Deferred Payments: Deferred Payments, i.e. those payments

which are to be made in the coming time that typically arises in case of
borrowing and lending. It can be used as a method to make payments in the
future, due to its universal acceptability. Moreover, its value remains
comparatively constant, as well as it is more durable, in comparison to
other goods.

• Store of Value: Money is a highly convenient and easiest way to store

wealth, which does not lose its value over a period of time. And as a
medium of exchange, it can be used to buy goods and services. Hence, if
you have the money, you have the purchasing power. In other words, the
value of goods is stored in the money that you possess.

• Transfer of Value: Money can be easily transferred from one place to

another and from one person to another. People can either transfer money
physically or digitally or they can use plastic cards to withdraw money
anywhere.
3.) IMPORTANCE OF MONEY :
 1. Money helps us to avoid double coincidence of wants –Money enables us to
understand the complex system of a large number of prices of goods and services in
terms of each other that prevail in the barter system which made it difficult to
compare various prices and take the
right optimal decision. Money made it possible to compare prices of different goods
and services in a standard unit.

2. Money Promotes Saving –Money has made saving much easier than it was in the
barter system. Increase in savings leads to the increase in investment which
promotes the economic growth of a country. Further money has made the process
of borrowing and lending much easier which leads to an increased level of
production and consumption in an economy. Investment which is made possible by
savings raises the rate of capital formation, which in turn raises the output in the
modern economy.

3. Money Helps in Maximizing Satisfaction by Consumers –To consumers money

represents a general purchasing power, they can buy anything and anytime with
money. Consumers can easily compare the relative prices of goods and services and
expected utility from them as the value of all goods and services are expressed in
terms of money (a common measure). A consumer can easily spend his money on
different goods and services in such a way that marginal utilities of goods and
services are proportional to their prices. This will maximize the consumer
satisfaction.
4.) MEASURES OF MONEY SUPPLY :
 The total money held by the public of a country at a specific point
of time is known as Money Supply. It consists of both cash and
deposits that can be easily used as cash. The money supply of a
country has a major impact on its economy.Till 1967-68, only the
narrow measure of the money supply was used by the Reserve
Bank of India (RBI). However, since 1977, four measures of money
supply have evolved in the economy, i.e., M1, M2, M3, and M4. 

1. M1

The first and basic measure of the money supply is M1, which is

also known as Transaction Money. It is called transaction money
because this measure can be directly used to make transactions.
The three different components of M1 are Currency and coins with
public, Demand deposits of Commercial Banks, and Other deposits
with RBI. All of these components can be easily used as a medium
of exchange; therefore, it is the most liquid measure of the money
supply.

M1 = Currency and coins with public + Demand deposits of

commercial banks + Other deposits with Reserve Bank of India.
 2. M2 :
The second measure of the money supply is M2, and is a broader concept
as compared to M1. It includes M1 and savings deposits with the post office
savings bank. One cannot withdraw Savings Deposits with Post Office
Saving Bank through cheque; therefore, it cannot be included in demand
deposits with the bank, resulting in the evolution of M2. 

M2 = M1 + Savings Deposits with Post Office Saving Bank.

3. M3 :
The third measure of the money supply is M3 and is a broader concept as
compared to M1. It includes currency and coins with public,demand
deposits with commercial banks,other deposits with RBI and Net Time
Deposits with Bank. 

M3 = M1 + Net Time Deposits with Banks

4. M4 :
The last measure of the money supply is M4, and is a broader concept as
compared to M1 and M3. It includes M3 and Total Deposits with Post Office
Saving Bank, but does not include NSC (National Saving Certificate).

M4 = M3 + Total Deposits with Post Office Saving Bank.

5.) COMPONENTS OF MONEY SUPPLY:
 The two main components of money supply are :
 1. Currency with public: it consist of paper notes and
coins held by public.Currency money is also termed as
‘fiat money’.Fiat money is defined as the money which
is under the fiat or order from the government to act
as money,I.e under law,it must be accepted for all
debts.
 2. In simple terms, demand deposits are accounts
through which you can withdraw money anytime you
need without giving any prior application or notice. It
is also known as ‘BANK MONEY’.
 A demand deposit is treated as equal to currency held
as it is readily accepted as a means of payment.
6.) CONCEPT AND WORKING OF
MONEY MULTIPLIER :
 Money multiplier is the number by which total deposits can increase due
to a given change in deposits. In other words,money multiplier is the
process by which the commercial banks create credit,based upon the
Reserve ratio and initial deposits.

Formula of Money Multiplier

Mathematically, the concept of money multiplier can be represented with

the help of a formula which is a follows:

Money Multiplier = 1/LRR  or  1/r

Where LRR is the legal reserve ratio. It is the minimum percentage of

deposits that is legally required to be kept by the commercial banks of the
economy with themselves and with the central bank of India, also known
as the RBI.Commercial banks are required to maintain reserves on two
accounts.
 Statutory Liquidity Ratio : Statutory Liquidity Ratio or SLR is the minimum
percentage of deposits that a commercial bank has to maintain in the form of
liquid cash.
 Cash Reserve Ratio : Cash Reserve Ratio or CRR is the minimum amount as
specified by the Central Bank, to be maintained by the Commercial banks of
the public deposits with the Central Bank. 
 WORKING OF MULTIPLIER :
 Suppose an initial deposit of ₹10,000 is made into the bank. The Legal
Reserve Ratio (LRR), which has to be maintained by the commercial
banks, is 20%.The banks keep only the minimum balance of LRR and
lend the rest of the money to the public.
 This process is better understood by making two assumptions:
 Entire commercial banking system is one unit and termed as ‘BANK’.
 All the receipts and payments are routed through banks.
 Solution: Money multiplier Formula = 1÷ LRR
 Money multiplier = 1÷ 20 × 100
 Money multiplier = 5 times
 Total deposits = Initial Deposit × Money multiplier
 Total deposits = 10000 × 5 = 50000
It shows that the initial deposit of ₹10,000 will be increased up to 5
times excluding the reserves.The following table will explain the process:
The initial deposits of ₹10,000 have been
made into the bank, and the banks are
required to maintain 20% of the deposits
with them as the LRR is 20%, therefore
the bank has to maintain 20% of ₹10,000
i.e. ₹2,000 with itself and can lend the
rest of the money i.e. ₹8,000 as loans to
the public. As all the payments are done
through the banks, therefore the amount
of ₹8,000 comes again to the bank and
the bank will keep 20% of this amount
i.e. ₹1,600 with itself, and will lend
again the rest of the amount i.e. ₹6,400
to the public. This process will go again
and again till the time the value of
deposits doesn't become ₹50,000. As the
value of the money multiplier is 5, it
means the value of initial deposits of
₹10,000 will become ₹50,000 till the
end. This process will continue till the
initial deposits increase to ₹50,000.