Money is anything that is generally accepted as a means of payment for goods, services and debts. It replaced the older barter system, in which goods were exchanged directly. The functions and types of money are basic exam topics that build the base for banking questions.
Functions of Money
- Medium of exchange - money is used to buy and sell goods and services.
- Measure of value (unit of account) - the value of all goods is expressed in money.
- Store of value - money can be saved for future use.
- Standard of deferred payment - money is used to settle future debts.
Problems of Barter
- Required a double coincidence of wants - both parties needed what the other had.
- No common measure of value.
- Goods could not be stored easily.
- Money solved all these problems.
Advertisement
Types of Money
- Commodity money - has value of its own, like gold or silver coins.
- Fiat money - has value because the government declares it legal tender, like currency notes.
- Fiduciary money - based on trust, like cheques.
- Legal tender - money that must be accepted by law.
Money Supply in India
- The RBI measures money supply through M1, M2, M3 and M4.
- M1 = currency with public + demand deposits; the most liquid measure.
- M3 is called broad money and is the most used measure.
- Currency notes are issued by the RBI as legal tender.
Quick Revision Points
- Money replaced the barter system.
- Functions: medium of exchange, measure of value, store of value, deferred payment.
- Barter needed a double coincidence of wants.
- Fiat money = value by government order.
- Money supply: M1, M2, M3, M4.
- M1 = most liquid; M3 = broad money.