Economics | Class 12 Notes
Contents
• Barter system
• Definition
• Drawbacks
• Money
• Evolution
• Legal definition
• Functional definition
• Indian Monetary System
• Money supply
• High powered money
• Money Multiplier
• Bank
• Commercial bank
• Money creations in commercial bank
• Central bank and its functions
• Ratios
• Cash reserve ratio
• Statutory liquidity ratio
• Legal reserve ratio
• Rate
• Repo rate
• Reverse repo rate
Barter System
• No money transaction
• Commodity transaction
• Also called C-C Economy
• Drawbacks
• Lack of
• Double coincidence of wants
• Divisibility
• Store of value
• Common measure of value
• Standard for deferred payments
Money
• Accepted as a means of exchange
• A measure of value
• A store of value
• Evolution of Money
• Commodity Money
• Animal money
• Metallic money
• Full bodied money
• Token coins
• Paper money
• Representative paper money
• Convertible paper money
• Non-convertible paper money
• Credit Money
• Plastic Money
Money
• Legal Definition
o Legal power to act as a medium of exchange and to discharge debt.
o Legal Tender Money (Flat money) – order of authority of the Government
o Non-Legal Tender Money (Fiduciary Money) – acceptance not compulsory, based on mutual trust – e.g. cheques, bills of exchange
• Functional Definition of Money
• Anything accepted as a means of exchange
• Acts as a store of value
System
• Indian Monetary system
• Currency notes issued by RBI
• Monetary authority of India – RBI
• Coins issued by GOI
• Money Supply
• Total amount of money available in an economy.
• Four alternative measures by RBI
• M1 = C + DD + OD
• M2 = M1 + SDPOSB
• M3 = M1 + NTDCB
• M4 = M3 + TDPOSO – NSC
C = Currency held by the public
DD = Demand Deposits
OD = Other Deposits with the bank
NTDCB = Net Time Deposits of Commercial Bank
TDPOSO = Total Deposits with Post Office Savings Organisations
High Powered Money (HPM)
• Currency held by the public (R)
• Reserves of the commercial banks (C)
• Vault cash and banks deposit with RBI
• HPM = R + C
• Money Multiplier (MM)
• MM = M/H
• Stock of money
• Stock of High Power Money
Banks
• Bank
• Institution which receives funds from the public
• Gives loans and advances
• Commercial Banks
• Accept deposits from public
• Lend out money to consumers
• Giving loan to investors
• And earn profits
• Money Creation by Commercial Bank
• Bank deposits
• Money Creation = ID x 1/LRR
• ID = Initial Deposit
• LRR = Legal Reserve Ratio
Central Bank
• Reserve Bank of India (RBI)
• The apex body
• Controls, regulates, directs and operates entire banking and monetary system
• Functions of RBI
• Issues of currency
• Credit control
• Banker to the Government
• Banker to the banks
• Lender of last resort
• Custodian of foreign exchange reserves
Ratios
• CRR – Cash Reserve Ratio
• Min. percentage of bank’s total deposits with RBI
• SLR – Statutory Liquidity Ratio
• Min. fixed percentage of its assets (cash or liquid assets)
• Can be kept with the bank itself
• LRR – Legal Reserve Ratio
• LRR = CRR + SLR
• Legal min. fraction of deposits
• Repo Rate
• Rate of RBI Loan to commercial bank against security pledged for the loan
• Reverse Repo Rate
• Interest Rate of Commercial bank deposit their surplus funds with RBI