CBSE Class 12 Ecomonics - Money and Banking

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CBSE Class 12 Ecomonics - Money and Banking. Learning the important concepts is very important for every student to get better marks in examinations. The concepts should be clear which will help in faster learning. The attached concepts made as per NCERT and CBSE pattern will help the student to understand the chapter and score better marks in the examinations. 

UNIT – VII: MONEY AND BANKING

MEANING OF MONEY: Money is anything which is generally accepted as medium of exchange, measure of value, store of value and as means of standard of deferred payment.

FUNCTIONS OF MONEY: Functions of money can be classified into Primary and Secondary

Primary/Basic functions:-
i) Medium of Exchange: - It can be used in making payments for all transactions of goods and services.

ii) Measure /Unit of value: - It helps in measuring the value of goods and services. The value is usually called as price. After knowing the value of goods in single unit (price) exchanges become easy.

Secondary functions:-

i) Standard of deferred payments: Deferred payments referred to those payments which are to be made in near future.
Money acts as a standard deferred payment due to the following reasons:

a) Value of money remains more or less constant compared to other commodities.
b) Money has the merit of general acceptability.
c) Money is more durable compare to other commodity

ii) Store of value: Money can be stored and does not lose value Money acts as a store of value due to the following reasons:
a) It is easy and economical to store.
b) Money has the merit of general acceptability.
c) Value of money remains relatively constant

MONEY HAS OVERCOME THE DRAW BACKS OF BARTER SYSTEM:

1. Medium of Exchange: Money has removed the major difficulty of the double coincidence of wants.

2. Measure of value: Money has become measuring rod to measure the value of goods and services and is expressed in terms of price.

3. Store of value: It is very convenient, easy and economical to store the value and has got general acceptability which was lacking in the barter system.

4. Standard of deferred payments: Money has simplified the borrowing and lending of operations which were difficult under barter system. It also encourages capital formation.

MONEY SUPPLY: refers to total volume of money held by public at a particular point of time in an economy.

M1=currency held by public + Demand deposits + other deposits with Reserve Bank of India.

M2=M1+saving deposits with post office saving bank

M3=M1+net time deposit with the bank

M4=M3 + total deposits with post office saving bank excluding national saving certificate

HIGH POWERED MONEY:

Refers to, currency with the public (notes +coins) and cash reserve of banks.

MONEY CREATION/DEPOSIT CREATION/CREDIT CREATION BY COMMERCIAL
BANK
Let us understand the process of credit creation with the following example.
Suppose there is an initial deposit of Rs. 1000 and L.R.R. is 20% i.e., the banks have to keep Rs. 200 and lend Rs. 800/-. All the transactions are routed through banks. The borrower withdraws his Rs. 800/- for making payments which are routed through banks in the form of deposits account. The Bank receives Rs. 800/- as deposit and keeps 20% of Rs.800/- i.e., Rs.160/- and lends Rs.640/- . Again the borrower uses this for payment which flows back into the banks thereby increasing the flow of deposits.

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