money and supply ,types of money
TRANSCRIPT
WELCOME
MONEY
zzzzEMERGENCE OF MONEY
Exchange of goods for goods is called barter system.
Barter system suffered from many drawbacks, such as :
Lack of double coincidence of wants Lack of common measure of value Lack of divisibility Difficulty in storing wealth Difficulty in borrowing and lending
WHAT IS MONEY????
According to G. Crowther, “ Money is anything that is generally accepted as a medium of exchange and at the same time acts as a measures and as a store of value”.
Kinds of money:
Paper money
Metallic money
Private bank money
Primary functions
Medium of exchange Measurement of value
Secondary functions
Store of value
Transfer of value
Standard of deferred payment
Contingent functions
Distribution of national income Basis of credit and credit creation Guarantee of solvency Maximization of satisfaction Bearer of option
Keynesian theory of demand for money
Keynesian theory of the demand for money was first formulated by Keynes in his well-known book, The Genera’ Theory of Employment, Interest and Money (1936). It has developed further by other economists of Keynesian persuasion. Keynes stated that people’s demand for money does not mean the actual cash balances people hold , but the amount of cash balances they WANT TO HOLD” .In understanding Keynes’ theory two questions need to separate.
One is why money is demanded?
Other is what are the key determinants of demand for money?
Demand for money
Money is the most liquid form of asset. The demand for money refers to the total money demanded by the people in the form of cash for various purposes. According to Keynes, This theory is also known as “Liquidity Preference”.
The demand for money arises because of the following three motivates:
Transaction motive
Precautionary motive
Speculative motive
Transaction motive
Holding cash to meet daily needs is called Transaction motive the need for holding cash arises because there exist a time-gap between receipt of income and the consumption expenditure.
Usually, people receive income at certain intervals of time such as a week, a month, etc,. which is to be consumed throughout the period till the next receipt.This demand for money is a positive function of income.
precautionary motive
The demand for money to meet this unforeseen and unexpected expenses in known as precautionary demand for money.
Like the transaction demand for money, precautionary demand for money is also a positive function of money.
Emand for money Speculative motive
The speculative demand for money refers to the demand for the money that people hold as idle cash balance to speculate with the aim of earning capital gains and profits.
Keynes demonstrated that there is a inverse relationship between the rate of interest and speculative demand for money.
Keyne’s theory of demand for money
Transaction motive
Precautionary motive
Speculative motive
Cash needed to conduct day-day
transactions
Cash needed to meet unforseen
contingencies
Hold of cash to achieve capital
gains
Time gap between receipts and
payments
Uncertainity about future receipts and
expenditure
Uncertainity of future market rate of interest
Mt is income determined and interest inelastic
Mp is income determined and interest inelastic
Ms is income determined and interest elastic
Graphical representation of keyne’s theory
Total demand for money = Mt + Mp + Ms
Where, Mt = f(y), as income increases, demand transaction motive increases
Mp = f(y), as income increases, demand for precautionary motive
increases. Ms = f(i), as interest rates increases, demand for speculative motive
decreases and vice-versa.
Liquidity trap
The concept of liquidity trap was also an outcome of Keynes's thought. It is an unfavorable conditions of an economy in which the monetary authority cannot do anything. As mentioned above speculative motive of demand for money is depending on the market rate of interest. At a lower rate of interest the bond price will raise. So, People demand money increases. But in an unfavorable economic condition a sharp reduction in the Interest rates will lead to a trap which is popularly called by economist’s the “liquidity trap”. This can be shown in the .following figure:
Supply of money
Supply of money refers to aggregate stock of money i.e.,. Currency notes and coins held by the people in the country at a particular point of time. The monetary authority of an economy undertakes the task of issuing currency notes and coins. In India the monetary authority and RBI together forms the monetary authority. Currency notes are issued by RBI and coins are issued by monetary authority. They together known as High Power Money.
The stock of money has the following two major components: The currency component The deposit component
Importance of money supply
Money supply plays a crucial role in the determination of price level and interest level.
Growth of money supply helps in acceleration of economic development and price stability
There must be a controlled expansion of money supply i.e., no inflation or deflation in the economy.
The supply of money depends on monetary base and reserve ratio, But not on the interest rate, so the supply of money is vertical.
Measures of money
Since, April 1977, RBI has adopted four concepts of money supply . i. e, M1,M2,M3,M4.
M1 : It includes with money public, demand deposits and other deposits with RBI. It is termed as narrow money. It is measured as follows:
M1 =C+DD+ODWhere,
C= Represents currency with publicDD= Represents demand deposits with
commercial banksOD= Represents other deposits with RBI
M2: It includes all the components of M1 and savings deposits with the post office. It is measured as follows:
M2 = M1 + POSBDWhere,
POSBD= Represents post office savings bank deposits.
M3: It includes all the components of M1 along with the time deposits of all banks. It is “ Broad money” concept. It is measured as follows:
M3 = M1 + TDwhere,
TD = Represents Time deposits with all banks.
M4: It includes all the components of M3 and total deposits with post office savings deposits( excluding National Savings Certificates) . It is measured as follows:
M4 = M3 + TOPDWhere,
TOPD = Represents total post office deposits (excluding NSCs)
Liquidity and ranking
NAME TYPE LIQUIDITY
M1 Narrow money Highest
M2 Narrow money Less than M1
M3 Broad money Less than M2
M4 Broad money Lowest Liquidity
New measures of money supply
Initially for the last quarter of 20th century, RBI used to calculate money supply and monetary aggregates in four forms namely, M1, M2, M3, M4. But thereafter, RBI working group on money supply has modified the parameters of measuring money supply. Thus, at present there exists only three monetary aggregates. i.e., NM1, NM2, NM3.
NM1=currency with the public + demand deposits with the banking system + other deposits with the RBI.
NM2= NM1 + Short term time deposits of residents (including and up to the contractual maturity of the year)
NM3= NM2 + long term deposits f residents + call/ term funding from financial institutions.
Narrow money
Narrow money refers to coins and currency notes with public, demand drafts with bank and other deposits with RBI. It is represented in M1 or NM1. The money which is fully liquid and available whenever people need is called narrow money.
The narrow definition of money can be represented as:
Narrow money = C + DD + OD
where, C= Represents narrow definition of money
DD= Represents currency held by the publicOD= Represents other deposits with RBI
Broad money
Broad money refers to the money that is held in the form of savings and Net Time Deposits besides the currency and demand deposits. It is the money which is represented by M3 or NM3. IT includes both full liquid and less liquid money.
The broad money can be represented as:
Broad money= C + DD + SD + TD
Where, C= Represents currency held by the public
DD= Represents demand deposits held by the commercial banks SD= Represents saving deposits of the public held with post office TD= Represents Time deposits with the commercial banks.
Presented by
Vishwaroopa YadavVilmaVidyaNeiniJatin SakariaPraveen Kumar
Any Questions ??????????