Banking Materials : All About Money

All About Money ::

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Money is a thing that is usually accepted as payment for goods and services as well as for the repayment of debts.
Types of Money ::
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Commodity Money -
Commodity money value is derived from the commodity out of which it is made. The commodity itself represents money and the money is the commodity. For instance, commodities that have been used as mediums of exchange include gold, silver, copper, salt, peppercorns, rice, large stones, etc.
Representative Money -
Representative Money includes token coins, or any other physical tokens like certificates, that can be reliably exchanged for a fixed amount/quantity of a commodity like gold or silver.
Fiat Money -
Fiat money, also known as fiat currency is the money whose value is not derived from any intrinsic value or any guarantee that it can be converted into valuable commodity (like gold). Instead, it derives value only based on government order (fiat).
Commercial Bank Money -
Commercial bank money or the demand deposits are claims against financial institutions which can be used for purchasing goods and services.
Narrow and Broad Money -
Money supply, like money demand, is a stock variable. The total stock of money in circulation among the public at a particular point of time is called money supply. RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3 and M4.
They are defined as follows -
M1 = CU + DD
M2 = M1 + Savings deposits with Post Office savings banks
M3 = M1 + Net time deposits of commercial banks
M4 = M3 + Total deposits with Post Office savings organisations
(excluding National Savings Certificates) where, CU is currency (notes plus coins) held by the public and DD is net demand deposits held by commercial banks. The word ‗net‘ implies that only deposits of the public held by the banks are to be included in money supply.
The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of money supply.
M1 and M2 are known as narrow money. M3 and M4 are known as broad money.These gradations are in decreasing order of liquidity. M1 is most liquid and easiest for transactions whereas
M4 is least liquid of all. M3 is the most commonly used measure of money supply. It is also known as aggregate monetary resources.