Money and Banking Class 12 Notes
This article will help you understand the Unit : Money and Banking Class12 of Macroeconomics in an easy and effective manner.
After reading this article you will be able to answer the following questions of , Class 12 Macroeconomics Money and Baking.
And if you want to read about Barter System , and evolution of Money You must refer this article
Money and Banking Class 12
In the Beginning of the Unit the Concept of Money and it's functions are explained in detail with an overview of the whole unit.
What is money?
What are the functions of Money?
What is Barter system?
What are the problems in Barter system?
What is supply of money?
Measures of Money Supply?
Meaning of banking?
Functions of Banking?
What is central bank and it's functions?
Money :
Money is anything which is widely accepted as a medium of exchange and has measure of value for the exchange of goods and services and to meet our financial and household obligation.
"Money is What Money does "
Functions of Money :
-Primary Functions (Basic Functions)
-Secondary Function (Derivative Functions)
Primary Functions:
1)Medium of exchange
When money is used to intermediate the exchange of goods and services, it is performing a function as a medium of exchange.
2)Measure of value
It is a standard numerical unit of measurement of market value of goods, services, and other transactions. It is a standard of relative worth and deferred payment, and as such is a necessary prerequisite for the formulation of commercial agreements that involve debt.
 |
| Money and Banking |
Secondary Functions :
3)Store of value
To act as a store of value, money must be reliably saved, stored, and retrieved. It must be predictably usable as a medium of exchange when it is retrieved. Additionally, the value of money must remain stable over time.
4) Standard of deferred payments
Money now can be used as a standard of future payments that is money can now be used to make payment of any future obligation.
What is Barter system?
Barter system is the primitive time system which was used for direct exchange of the goods. One commodity for other. In other words it is known as Commodity to commodity economy "CtoC" economy that is commodity to commodity.
Barter System
Problems faced in the Barter system :
- Lack of Double coincidence of wants
- Lack of Divisibility
- Lack of Common Measure
- Difficulty in Deferred payments
- Difficulty Of storage and transfer of wealth
- Difficulty in Exchange of Services.
You want To know more about barter system you must have to visit – Barter System
What is Supply of money?
Measures of Money Supply
M1 = Currency with Public + Demand Deposits + Other deposit
held with RBI
It is the narrower concept of all . M1 mainly includes liquid cash or easy transferable to cash items i.e. why it is the most liquid Measure.
M2 = M1 + Savings deposits with post office savings banks.
It is less liquid as compared to the M2. And it consists of M1 + saving deposits with post office saving bank.
M3 = M1 + Time Deposits
It is the broadest concept of all . M3 is the less liquid measure as it include time deposits.
M4 = M3 + Total Deposits with the Post office Savings organizations.
It is the least liquid measure as compared to the rest ones as it includes M3 + total Deposit with Post office Saving Organisations
Factors Affecting Money Supply :
- Commercial Banks
- Capacity and Policy of Credit
- Government fiscal policy
- Community's Choice.
What is Bank and Banking System?
"Banking means the accepting foe the purpose of lending of money from people, repayable on demand or otherwise, and withdraw by cheque's, drafts, order."
There are mainly two types of banks in a country :
- Commercial Bank
COMMERCIAL BANK :
Functions Of Commercial Bank
(1) Primary Functions
- Accepting Deposits
It is the most important function of commercial banks. They accept deposits in several forms according to the requirement of different sections. The various kinds are :
(1) Current account Deposit
(2) Fixed Deposits
(3) Savings Deposits
- Advancing Loans
The deposits received by banks are not allowed to remain idle so after keeping certain cash reserves the balance is given to name the borrowers and interest is charged from them which is the main source of income for these banks.
 |
| Functions odf commercial banks |
(2) Secondary Functions
- Overdraft Facility
It refers to a facility in which a customer is allowed to overthrow his current account after when agreed limit this facility is generally given to respectable and reliable consumers for a short period of time.
- Agency Function
Commercial banks also perform certain agency functions for their customers for the services they charge some commission from their clients some of them are
(1)transfer of funds
(2) collection and payment of various items (3) purchase and sale of foreign exchange
(4) Purchase and sale of securities
- Discounting Bills of Exchange
It refers to a facility in which holder of a bill of exchange can get the bill discounted with bank before the maturity after deducting some amount of commission bank pay the balance to the holder .On maturity Bank gets its payment from the party which had accepted the bill.
-Genreal Utility Function.
Some of the general utility functions are (1)locker facility
(2) Travellers cheque
(3) letter of credit
(4) underwriting securities collection of statistics
CENTRAL BANK :
Functions of Central Bank :
(1) Bank of Issue (Currency Authority)
Central bank has the sole authority for issue of currency in the country. In India RBI has the sole authority to issue currency expect coins which are issuedby Ministry of Finance.
(2) Banker to the Government
The Reserve Bank of India acts as a banker, agent and a financial advisor to the Central Government and all the State Government
 |
| Banker's Bank |
(3) Banker's Bank and Supervisor
As the Banker to the banks, the Central Bank functions these functions :
-Custodian of Cash Reserves
-Lender of the last Resort
-Clearing House
(4) Controller of Money Supply and Credit
It regulates the monry supply in the economy through its 'Monetary Policy'.
Central Bank ( RBI in case of India) use the following Instruments in order to control the money supply in the economy.
- Repo (Repurchase) Rate :
Repo rate is the rate at which the central bank of a country (RBI in case of India) lends money to Commercial Bank to meet their short-term needs
- Bank Rate ( Discount Rate):
Bank rate is the rate at which the central bank of a country (RBI in case of India) lends money to commercial banks to meet their long-term needs
- Open Marker Operations
Open market operations refers to buying and selling of government securities by Central Bank from and to public and the commercial banks.
- Margin requirements
Margin refers to the difference between the amount of loan on the market value of security which is offered by the borrower against the loan in the period of their transaction.
- Legal Reserve Requirements
every Bank working under the central bank is required to maintain some reserve which should be handy for the banks in the time of need. In this way central bank also keeps a check on the credit creating capacity of the banks.
- Moral suasion
It is called the persuasion and the pressure of the central bank upon the commercial banks in order to keep them in line according to their policy
- Selective Credit Controls
Under this method the RBI restricts or directs the bank to give credit on certain conditions under certain circumstances to any particular sector.
This is whole brief about Money and Banking Class 12 and if you want to study about barter system you can check out –
Frequently Asked Questions (FAQ's)
Q: What is High powered Money?
A: High Powered Money is the money produced by the RBI and the Government. It consists of two things :
(1) Currency held by the Public
(2) Cash reserves with the banks.
Q: What is Fiat money?
A: Money issued by order of Government and people are legally bound to accept it. For example, notes or currency.
Q: What is fiduciary Money?
A: Money which is accepted as medium of exchange because of trust between payer and payee. A person is not legally bound to accept it. For example, cheque's, bills or exchange etc.
Q: What is legal tender?
A: Money which can be legally used to make payment of debts or other obligations is termed as legal tender money.
Very interesting and valuable content
ReplyDelete