MONEY

Definition and Meaning

Money is any object or record, that is generally accepted as

payment for goods and services and repayment of debts in a given
country
Money originated as commodity money, but nearly all
contemporary money systems are based on fiat money.

Fiat money is without intrinsic use value as a physical commodity,

and derives its value by being declared by a government to be legal
tender; that is, it must be accepted as a form of payment within
the boundaries of the country, for "all debts, public and private".
 Functions of Money

1. Money as a Medium of Exchange:

The function of money as a medium of exchange
solves all the difficulties of barter system. There is no
necessity for a double coincidence of wants in the
money economy. The man with cow who wants to
purchase cloth need not seek a cloth seller who wants
a cow. He can sell his cow in the market for money and
then purchase cloth with the money obtained.
 The most important job of money is to serve
as a medium of exchange
• When any good or service is purchased, people
use money
• Money makes it easier to buy and sell because
• money is universally accepted
• Money, then, provides us with a shortcut in

doing business
• Money facilitates exchange by reducing

the cost of trading.

• Without money, we would have to barter.
2. Unit of account
In money economy values of all commodities are expressed in
terms of money. Money is like the yard stick and measures the
value of all varieties goods. This function of money makes
transactions easy and also fair
• Money is used as a common denominator to measure the relative
values of goods and services.
• Without money, we would have to measure
• the value of goods and services in terms of other goods and
services.
3. Standard of Deferred Payment
Goods cannot be stored because they are perishable.
People receive their incomes in money form and keep
their savings in money form in banks. In this way, money
is used to store value of commodities.
A "standard of deferred payment" is an accepted way to
settle a debt
• Money is a financial asset that can be used to store
wealth (income that you have saved and not
consumed).
• As a store of wealth, money pays no interest, but is
perfectly liquid.
• Money’s usefulness as a store of wealth depends on
how will it maintains its value.
4. Store of Value

In a money economy the contracts are made for future

payments terms of money instead of goods and
promise to repay the loan in money. In this way money
is the standard of deferred payments. This function
stimulates all kinds of economic activities which depend
on borrowed money.
To act as a store of value, a money must be able to be
reliably saved, stored, and retrieved – and be
predictably usable as a medium of exchange when it is
retrieved. The value of the money must also remain
stable over time. Some have argued that inflation, by
reducing the value of money, diminishes the ability of
the money to function as a store of value.
 Demand for Money
• The demand for money represents the desire of households
and businesses to hold assets in a form that can be easily
exchanged for goods and services. Spendability, or liquidity, is
the key aspect of money that distinguishes it from other types
of assets. For this reason, the demand for money is
sometimes called the demand for liquidity.
• The demand for money is often broken into three distinct
categories:
1. Transactions Motive
• The primary reason people hold money is because they expect to
use it to buy something sometime soon. In other words, people
expect to make transactions for goods or services.

• How much money a person holds onto should probably depend upon
the value of the transactions that are anticipated. Thus, a person on
vacation might demand more money than on a typical day.

• Wealthier people might also demand more money because their

average daily expenditures are higher than the average person.
2. Speculative Motive
• The second type of money demand arises by considering
the opportunity cost of holding money. Recall, that holding
money is just one of many ways to hold value or wealth.

• Alternative opportunities include holding wealth in the

form of savings deposits, certificate of deposits, mutual funds,
stock, or even real estate.

• For many of these alternative assets interest payments, or at

least a positive rate of return, may be obtained.
J.M Keynes, in laying out speculative reasons for holding
money, stressed the choice between money and bonds.
If agents expect the future interest rate (the return on
bonds) to be lower than the current rate they will then
reduce their holdings of money and increase their
holdings of bonds
If the future interest rate does fall, then the price of
bonds will increase and the agents will have realized a
capital gain on the bonds they purchased.

This means that the demand for money in any period

will depend on both the current interest rate and the
expected future interest rate (in addition to the
standard transaction motives which depend on
income).
3. Precautionary Motive

This refers to the motive behind keeping

money in liquid form in order to meet
unforeseen contingencies such as, accident.
Illness, unemployment etc…
 Money Supply

Meaning and Definition:

• In economics, money supply or money stock, is the total
amount of money available in an economy at a particular point in
time.
• Money supply data are recorded and published, usually by the
government or the central bank of the country.
• Public and private sector analysts have long monitored
changes in money supply because of its possible effects on the
price level, inflation and the business cycle.
 Sources of Money Supply

The Reserve Bank of India defines the monetary aggregates

as:
M1: Currency with the public + Deposit money of the public
(Demand deposits with the banking system + ‘Other’
deposits with the RBI).

M2: M1 + Savings deposits with Post office savings banks.

M3: M1+ Time deposits with the banking system = Net bank
credit to the Government + Bank credit to the commercial
sector + Net foreign exchange assets of the banking sector +
Government’s currency liabilities to the public – Net non-
monetary liabilities of the banking sector (Other than Time
Deposits).

M4: M3 + All deposits with post office savings banks (excluding

National Savings Certificates).
 What are Bonds?

In finance, a bond is a debt security, in which the

authorized issuer owes the holders a debt and,
depending on the terms of the bond, is obliged to
pay interest (the coupon) and/or to repay the
principal at a later date, termed maturity.

A bond is a formal contract to repay borrowed money

with interest at fixed intervals.
A bond is like a loan: the issuer is the borrower (debtor),
the holder is the lender (creditor), and the coupon is the
interest.
Bonds provide the borrower with external funds to
finance long-term investments, or, in the case of
government bonds, to finance current expenditure.

Bonds must be repaid at fixed intervals over a period of

time.
• Just as people need money, so do companies and
governments.
• A company needs funds to expand into new markets, while
governments need money for everything from infrastructure
to social programs.
• The problem large organizations run into is that they
typically need far more money than the average bank can
provide. The solution is to raise money by issuing bonds
• Thousands of investors then each lend a portion of
the capital needed.
• A bond is nothing more than a loan for which you are
the lender.
• The organization that sells a bond is known as the
issuer. You can think of a bond as an IOU given by a
borrower (the issuer) to a lender (the investor
• Nobody would loan his or her hard-earned money
for nothing.
• The issuer of a bond must pay the investor
something extra for the privilege of using his or her
money.
• This "extra" comes in the form of interest
payments, which are made at a predetermined rate
and schedule.
• The interest rate is often referred to as the coupon.
The date on which the issuer has to repay the
amount borrowed (known as face value) is called the
maturity date.

• Bonds are known as fixed-income securities

because you know the exact amount of cash you'll
get back if you hold the security until maturity.