1. Monetary System

2. Chandegara Jayesh V.
Chauhan Divyesh A.
Chauhan Hiren M.
Dholkiya Gaurang D.
Havewala Adarbadgar P.
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3. Introduction of Monetary System
• Monetary system includes the following points:
• Meaning of money
• Functions of money
• Kinds of money
• Types of money
• The money supply
• What assets are considered as money?

4. Meaning of money
• A medium that can be exchanged for goods and
services and is used as a measure of their values
on the market, including among its forms a
commodity such as gold, an officially issued coins
or note.
OR
• The officially issued coins, paper notes and
currency by government.

5. Functions of money
• Medium of exchange: An item buyers give to sellers
when they want to purchase g & s.
Money's most important function is as a medium of
exchange to facilitate transactions. Without money, all
transactions would have to be conducted by barter,
which involves direct exchange of one good or service
for another.
Money effectively eliminates the double coincidence
of wants problem by serving as a medium of exchange.

6. Functions of money
• Unit of account: The yardstick people use to post
prices and record debts.
Provides a common measure of the value of
goods and services being exchanged.
Knowing the value or price of a good, in terms of
money, enables both the supplier and the purchaser
of the good to make decisions about how much of
the good to supply and how much of the good to
purchase.

7. Functions of money
• Store of value: An item people can use to transfer
purchasing power from the present to the future.
As a store of value, money is not unique; many
other stores of value exist, however, money is more
readily accepted everywhere.
Furthermore, money is an easily transported store
of value that is available in a number of convenient
denominations.

8. Kinds of money
• Metallic Money: Metallic money today consists of the
various coins in circulation.
• Paper Money: Paper money primarily consists of
currency notes issued by the Central Bank of a
country.
• Private Bank Money: Private bank money is
sometimes called check book money as well as
demand deposits.

9. Types of Money
• Commodity Money: Whenever any commodity is
used for the exchange purpose, the commodity
becomes equivalent to the money and is called
commodity money.
• Fiat Money: The word fiat means the "command of
the sovereign.” It is the type of money that is issued
by the command of the sovereign.
The paper money is generally called as the fiat
money.

10. Types of Money
• Fiduciary Money: Whenever, any bank assures the
customers to pay in different types of money and when
the customer can sell the promise or transfer it to
somebody else, it is called the fiduciary money.
Fiduciary money is generally paid in gold, silver or
paper money.
• Commercial Bank Money: Commercial Bank money
or demand deposits are claims against financial
institutions that can be used for the purchase of goods
and services.

11. Money supply
• The money supply is the amount of financial
instruments within a specific economy available for
purchasing goods or services.
• The money supply is usually measured as three
escalating categories M1, M2 and M3.
• The other two categories are M0, & M4.

12. Measures of money supply in India
Measure What’s included
M0 Currency in circulation + Bankers’ deposits with the RBI + ‘Other’ deposits
(Reserve with the RBI = Net RBI credit to the Government + RBI credit to the
money) commercial sector + RBI’s claims on banks + RBI’s net foreign assets +
Government’s currency liabilities to the public – RBI’s net non-monetary
liabilities.
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).

13. Assets considered as money
• Bills of exchange: A Bill of exchange is a promise to
pay a specified sum of money on a specified date,
generally after 3 months or 90 days.
Bills of exchange may be treasury bills or commercial
bills or financial bills :
(a) Commercial bills are drawn in connection with the
commercial transactions,
(b) Finance bills are drawn when a person lends money to
other person,
(c) Treasury bills are the finance bills through which the
government raises short-period funds.

14. Assets considered as money
• Bond: Bond is an instrument of borrowing for relatively
long periods.
It is a promise to pay a fixed sum of money by way of
interest annually for a specified number of years and to
repay the capital sum borrowed at the end of the period.
This method of borrowing is adopted by the
government and the industrial units. Bonds issued by the
firms are known as debentures.
Bonds issued by the government without a maturity
date but with interest payable for the indefinite period
are called irredeemable bonds or consols or perpetuities.

15. Assets considered as money
• Equity shares: Equity shares offer their owners a claim
to a share in the profits of the firm declared as
dividend.
They are marketable in the stock exchange.

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