1.

Define money and discuss the various concepts of money

Definition of Money: Money is anything that is generally accepted as a medium of exchange

for goods and services and for the repayment of debts. It serves as a standard measure of
value, a store of value, and a unit of account. In modern economies, money typically includes
currency (notes and coins) and demand deposits in banks.

Concepts of Money:

There are different concepts or measures of money used to represent the total money supply
in an economy:

1. Narrow Money (M1):

Includes:
o Currency with the public
o Demand deposits with banks (like current and savings accounts)
2. Broad Money (M3):
o Includes M1
o Plus time deposits with banks (like fixed deposits)
3. Liquidity Concept of Money:
o Considers how easily various assets can be converted into cash
o Broader than M1 and M3, includes near-money assets like savings with post
offices, certificates, etc.
4. High-Powered Money (H):
o Also called reserve money
o Composed of currency in circulation and reserves of commercial banks held
with the central bank

The Reserve Bank of India (RBI) uses these measures to track and manage money supply
effectively.

2. Discuss the various functions of money

Money serves several vital functions in a modern economy. These can be broadly classified
into primary, secondary, and contingent functions:

Primary Functions:

1. Medium of Exchange:
Money eliminates the need for a double coincidence of wants (as in the barter system)
and allows smooth transactions.
2. Unit of value (measuring unit):
Money provides a common measure for valuing goods and services, making trade
more efficient.
Secondary Functions:

1. Store of Value:
Money allows individuals to store wealth for future use, although inflation can affect
this function.
2. Standard of Deferred Payments:
Future payments, contracts, and credits are possible due to money being an accepted
standard.
3. Transfer of Value:

Money helps in the transfer of value between persons and places.

Example: Transferring money to a family member in another city or country.

Contingent Functions:

1. Money as the most liquid asset: Money is the most liquid asset or which wealth is
health. Individuals and firms make gold, wealth in varied forms including whole
wealth in varied forms including demand deposits ting deposits, bonds, securities,
stock of consumer goods of which money is the most liquid.
2. basis of the credit system: Money is the basis of the credit system. business
transactions are either in cash or on credit but money is at the back of all credit.
3. Equalizes of marginal utilities: Money act as an equalizer for the consumer. Since
prices of marginal utilities for goods indicate their marginal utilities and are expressed
in money. Money helps is equalizing the marginal utilities of various goods.

4. Measurement of National Income : Money helps is measuring national income. This

is done when the various goods and services produced in the country are in money
terms.
4. Discuss evolution of money

The evolution of money refers to the transformation of money from its earliest
forms to the modern-day currency and digital forms. Over time, as human
societies and economies grew more complex, money evolved to meet the
changing needs of trade and exchange

1. Commodity Money

 This is the earliest form of money where goods with intrinsic value were
used as a medium of exchange.
 Examples: Cattle, salt, grains, shells.
 These items were widely accepted due to their utility and value.
 Limitations: Not easily divisible, not durable, and difficult to store or
transport.

2. Metallic Money
  Societies began using metals like gold, silver, and copper as money.
 These metals were durable, divisible, and portable.
 Coins were minted with specific weights and marks of authority.
 Two types: Full-bodied money (metal value = face value) and Token money
(face value > metal value).

3. Paper Money

 With increasing trade, carrying metal became inconvenient, leading to the

use of paper currency issued by governments or central banks.
 It has no intrinsic value but is accepted due to legal authority and trust.
 Advantages: Lightweight, easy to produce and carry.
 Backed initially by gold or silver, but now largely fiat money (value based
on trust).

4. Credit Money

 Introduced with the development of banking systems.

 Includes instruments like cheques, bank drafts, promissory notes, and
electronic bank transfers.
 Represents money deposited in banks and used via various credit
instruments.
 It promotes economic growth by facilitating transactions without physical
cash.

5. Near Money

 Refers to highly liquid assets that are not actual money but can be quickly
converted into it.
 Examples: Savings accounts, fixed deposits, treasury bills, bonds.
 Used more as stores of value or short-term investments than as a medium
of exchange.
 Plays a key role in the broader money supply and liquidity in the
economy.

Conclusion

The evolution from commodity to near money reflects the increasing

sophistication of economies and the need for more efficient, secure, and
convenient methods of exchange.
4. Determinants of money supply and constituents of money supply
5. Value of money and purchasing power

Value of Money:

 The value of money refers to its purchasing power, i.e., the amount of goods and
services it can buy.
 It is inversely related to the price level:
o When prices rise, the value of money falls.
o When prices fall, the value of money rises.

Purchasing Power:

 Indicates how much goods and services a unit of currency can purchase.
 Affected by inflation and deflation:
o Inflation: Reduces purchasing power.
o Deflation: Increases purchasing power.

Factors Affecting Value of Money:

1. Inflation Rate:
Persistent rise in price level reduces real value.
2. Money Supply:
An excessive increase in money supply can reduce value due to increased demand and
inflation.
 3. Price Stability:
A stable price level ensures steady value of money and strong purchasing power.

Maintaining a stable value of money is a key objective of monetary policy to ensure

economic stability and avoid hardships due to fluctuating prices.

1. Meaning and Types of Inflation

Meaning of Inflation: A continuous increase in general price level is called inflation.

Pole Samulsum define inflation as arise in the general level of prices.

2. Causes of Inflation
3. Effects of Inflation in the Economy
1. Evolution of Central Banks

Meaning of a Central Bank:

A central bank is the apex financial institution in a country, responsible for managing
currency issuance, regulating the banking system, and implementing monetary policy to
ensure economic stability.

Evolution of Central Banks:

The concept of central banking evolved gradually:

1. Early Role as Government Bankers:

 o The earliest central banks, like the Bank of England (1694), started as
government bankers and debt managers.

2. Currency Issuance:

o Over time, central banks were entrusted with the exclusive right to issue
currency, ensuring standardization and control over money supply.

3. Lender of Last Resort:

o During financial crises, central banks took on the role of providing emergency
liquidity to prevent banking collapses.

4. Regulators of Commercial Banks:

o With economic development, central banks began regulating and supervising

the banking sector to maintain stability and prevent fraud.

5. Monetary Policy Authority:

o Modern central banks actively control inflation, credit, and interest rates
through tools like the repo rate, CRR, and open market operations.

6. International Coordination:

o Central banks today also coordinate globally through institutions like the IMF
and BIS, especially during global economic challenges.

Thus, the evolution of central banks shows a transformation from basic fiscal agents to
complex institutions managing economic policy and financial stability.

2. Note on Central Banking in India

Central Banking in India – The Reserve Bank of India (RBI):

 The Reserve Bank of India (RBI) was established in 1935 under the Reserve Bank of
India Act, 1934.

 Initially a private shareholder institution, it was nationalized in 1949, and became

the central authority for managing India’s monetary and banking system.

Key Features of RBI as India’s Central Bank:

1. Currency Issuer:
Sole authority for issuing currency notes (except one-rupee notes and coins issued by
the government).
 2. Banker to Government:
Manages government accounts, public debt, and issues loans to the government.

3. Regulator of Banks:
Supervises and controls commercial banks, cooperative banks, and other financial
institutions.

4. Monetary Policy Implementation:

Uses policy tools like CRR, SLR, repo/reverse repo rate to control inflation and credit.

5. Maintains Financial Stability:

Acts as a lender of last resort to prevent systemic banking failures.

6. Developmental Role:
Supports financial inclusion, rural banking, and agricultural credit.

7. Foreign Exchange Management:

Regulates India’s foreign reserves and exchange rate policy under FEMA.

The RBI is pivotal in guiding India’s economic growth, maintaining price stability, and
ensuring public confidence in the financial system.

3. Functions of RBI

The Reserve Bank of India (RBI) performs a wide range of functions categorized as follows: