Money (Macroeconomics) Class XII

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Money (Macroeconomics) Class XII


Chapter: Money





What is Money?


Money is anything that is widely accepted as a medium of exchange, making it easier to buy and sell goods and services.


Functions of Money


1. Medium of Exchange: Money enables easy trade by providing a common medium for exchanging goods and services.

2. Measure of Value: Money provides a standard unit to measure the value of goods and services.

3. Store of Value: Money can be saved and used later without losing its value.

4. Standard of Deferred Payment: Money facilitates borrowing and lending by providing a standard unit for repayment.

5. Transfer of Value: Money allows for easy transfer of value from one person to another.


Types of Money


1. Fiat Money: Currency notes and coins issued by the government, accepted because of government regulation.

2. Fiduciary Money: Money accepted based on trust, such as cheques and demand drafts.

3. Full-bodied Money: Money whose face value equals its metal value, like old gold or silver coins.

4. Credit Money: Money stored in banks, accessible through cheques, debit/credit cards, or online banking.


Money Supply


Money supply refers to the total amount of money available in an economy. In India, the Reserve Bank of India (RBI) measures money supply using four definitions:


1. M1 (Narrow Money): Currency, demand deposits, and other deposits with the RBI.

2. M2: M1 plus savings deposits with post offices.

3. M3 (Broad Money): M1 plus time deposits with banks (most commonly used measure).

4. M4: M3 plus total deposits in post office savings accounts.


Monetary System in India


India follows a fiat money system, where money has no intrinsic value but is accepted due to government regulation. The RBI manages money supply to maintain economic stability.


Conclusion


Money plays a crucial role in facilitating economic transactions, removing the limitations of barter. Understanding the functions, types, and supply of money is essential for grasping macroeconomic concepts.

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