MONEY AND BANKING: Know everything about it

What is money and how it can be used?

Barter System

Money is a medium of exchange which facilitates transactions between two parties.

A barter system is that in which goods are exchanged (one good for other) by parties on both sides but there can be a problem of double coincidence of wants in this. It means a party wanting the good doesn’t necessarily mean another party would also want that good.

So intermediary money can be used to buy a good and the other party can use the money to buy the good they want.

DEMAND FOR MONEY

Money is the most liquid asset. If you keep money in bank instead of cash it might give you interests.

Transaction motive is used to exchange goods. As it goes from one person to other person and then from second to third it keeps changing hands. The number of times money changes in a unit period is velocity of circulation of money.

Md=k.T

Where T is the total value of money, k is positive fraction and Md is the demand for money.

So velocity is 1/k.

Md=kPY

Where P is price and Y is GDP deflator.

BANKING WITH MONEY

When a person sells goods and gets money in exchange, he/she can put the savings in the bank.

NARROW MONEY AND BROAD MONEY

Lets suppose,

M1=CU (Currency Units)+DD (Demand Deposits)

M2=M1 + savings deposit with post office banks

M3 = M1 + Net time deposits of commercial banks M4 = M3 + Total deposits with Post Office savings organisations.

M1 is the most liquid.M1 and M2 is narrow money and M3 and M4 is broad money. It is in decreasing order of liquidity.

High Powered Money is that money which is issued by the government of India and RB. Some portion of the currency is kept along with the public and rest is kept as reserves in Reserve Bank.