Banking Awareness Question Day 19

Banking Awareness Question Day 19: Definition of Money

Money is an officially issued legal tender that typically consists of notes and coins. Money is the circulating medium of exchange as defined by a government. Money is often synonymous with cash and includes various instruments such as checks. Each country has its own money that it and its residents exchange for goods within its borders.

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Types Of Money:-

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 a Medium of exchange include gold, silver, copper, salt, peppercorns, rice, large stones, etc.

Representative Money – is money that 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.

Money Supply

The total stock of money in circulation among the public at a particular point of time is called money supply.
The measures of money supply in India are classified into four categories M1, M2, M3 and M4 along with M0. This classification was introduced in April 1977 by the Reserve Bank of India.

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1. Reserve Money (M0): It is also known as High-Powered Money, monetary base, base money etc.

  • M0 = Currency in Circulation + Bankers’ Deposits with RBI + Other deposits with RBI
    It is the monetary base of the economy.
  • It represents the total monetary liabilities of the RBI.

2. Narrow Money (M1):

  • M1 = Currency with public + Demand deposits with the Banking system (current account, saving account) + Other deposits with RBI

3. M2 = M1 + Savings deposits of post office savings banks

4. Broad Money (M3)

  • M3 = M1 + Time deposits with the banking system

5. M4 = M3 + All deposits with post office savings banks

The liquidity means how fast an instrument can be converted into cash. The liquidity
of these measures are in order M1>M2>M3>M4 i.e. M1 is most liquid and M4 is least