Money and Banking online Test - 24

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 functions of money can be classified into two categories: 

1. Primary function: The primary function of money includes money as a medium of exchange and money as a measure of value.

• As a medium of exchange, it refers to a function of money in which money is considered as a mode of exchanging goods. This function of money solved the main problem of barter system which was double coincidence of wants.
• As a measure of value, it refers to a function of money that helps in determining the value of goods and services. Money is taken as the common denominator while measuring the value of goods and services in monetary terms.

2. Secondary function: The secondary function of money includes money as a store of value and money as a standard of deferred payment. 

• As a store of value, it refers to the function of money  that helps individuals in storing their wealth in the form of money. Therefore, money acts as an asset that sustains value over a period of time
• As a standard of deferred payment, it refers to one of the most important functions of money. Deferred payments refer to payments made on loans, salaries, pensions, insurance premium, interests, and rents. The necessary condition for deferred payment is that the amount of repaid money should be the same as it was at the time of purchase of the good. Since all the goods and services can be expressed in terms of money, it makes the future payments easy and functional. 

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. 

M4 measurement of money supply is the least liquid money supply in India as it includes all the other deposits of post office savings other than national savings certificate.

M4 = M3 + Total deposits with post offices other than in the form of national saving certificate

In which, M3 = C+ DD+ OD + net time deposits with the commercial banks 

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.

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. 

M1 measurement of money supply is the most liquid money supply in India as it just includes currency held by the public in terms of coins and paper notes, demand deposits of the people with the commercial banks and some other deposits with other financial institutions. 

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. 

Precautionary motive of money refers to the demand for money to store it for future uncertainties. In other words,
if money is demanded so that it can be kept for bad days then the demand of such money is known as precautionary money. In such cases, money functions as the store of value. 
Precautionary money balance in needed in a company so that it can be used if there is any uncertainty of receipt in the income and expenditure statement which means the company can make use of this money if the expenditure exceeds the income in a particular year. 

 

 

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. 

In India, other deposits of post office savings other than national savings certificate are included in M4 measurement of money supply which makes it a most rigid form of money supply in terms of liquidity. M4 measurement of  money supply includes: 

M4 = M3 + Total deposits with post offices other than in the form of national saving certificate

In which, M3 = C+ DD+ OD + net time deposits with the commercial banks 

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. 

Precautionary motive of money refers to the demand for money to store it for future uncertainties. In other words, if money is demanded so that it can be kept for bad days then the demand of such money is known as precautionary money.
Precautionary money balance in needed in a company so that it can be used if there is any uncertainty of receipt in the income and expenditure statement which means the company can make use of this money if the expenditure exceeds the income in a particular year. 

According to J.M. Keynes, Money has speculative demand due to its function as a better store of value than any other long tern financial asset because of the following two reasons: 

Cash Reserves Ratio (CRR) refers to the proportion of total deposits of the commercial banks which they must keep as reserves with the central bank in the form of cash. By increasing the cash reserve ratio, the commercial banks has to maintain more cash with the central bank which  reduces their credit creation capacity and therefore money supply in the economy also reduces. Therefore, increase in cash reserve ratio(CRR) reduces the money supply in the economy. 

Precautionary motive of money refers to the demand for money to store it for future uncertainties. In other words, if money is demanded so that it can be kept for bad days then the demand of such money is known by the precautionary motive of money. In such cases, money functions as the store of value.