Money and Banking, Macroeconomics Flashcards
Barter System
A system of exchange in which participants in a transaction directly exchange goods or services for other goods or services
Trading good or services between two or more parties without money
DIsadvantages of Barter System
Lack of coincidence of wants
Lack of common measure of value
Lack of store of value
Lack of standard of deferred payments
Money
Money is any item or medium of exchange that is accepted by people for the payment of goods and services
Primary requirements of Money
Being accepted as :
Measure of value
Medium of exchange
Secondary requirements of Money
Being accepted as :
Store of value
and Standard of deferred payments
Money Supply
Total volume of money held by the public at a particular point of time
It’s a Stock concept
Measure of Money Supply
The RBI uses four measures of money supply denoted as M1,M2,M3,M4. M1
M1
Currency held by the public
Demand deposits of Commercial Banks
Other deposits with RBI
M2
M1 + Saving deposits with the Post Office
M3
M1 + Fixed Deposits
M4
M3 + All Saving deposits with Post Office (Not the currency held by the public)
Commercial Bank
An institution which performs the function of Accepting Funds, Lending Funds and making investments with the main aim of earning profits
Primary Functions of a Commercial Bank
Accepting and lending money
Secondary Functions of a Commercial Bank
Overdraft Facility
Discounting bills of exchange
Agency Functions
General utility functions
Types of Deposits
Demand Deposit, Fixed Deposit, Saving Deposit
Demand Deposit
Is for Current Account; A bank account from which deposited funds can be withdrawn at any time, without advance notice
Are commonly used by Business Firms
Has Check facility available
Fixed Deposit
An investment instrument offered by bank for Savings with a higher rate of interest than a regular savings account
Long Term Deposits
Saving Deposit
A limited number of Withdrawals, a lack of Cheque and linked Debit Card facilities
Combined features of both
Interest is also provided (but less than FDs)
Types of Loans
Cash Credit
Demand Loans
Short Term Loans
Cash Credit
Short-term source of financing given against assets for a company
Interest is charged monthly and only on the money withdrawn
Demand Loans
A loan that a lender can require to be repaid in full at any time
Interest is charged
Genreally short term
Interest is charged on the money withdrawn
Short Term Loan
Loans with little to no collateral that are to be repaid in a year or less,
Are offered to salaried employees of reputed companies in form of CC
Overdraft Facility
Overdraft Facility is a credit facility through which you can withdraw money from your savings or current account
Interest is charged at month end and delaying payment effects Credit Score
Discounting BIlls of Exchange
Encashment of a bill before its maturity date is referred to as discounting bills of exchange
Agency Functions of a Commercial Bank
Transfer of Funds
Collection and Payment of items
Purchase and Sale of Securties
Income Tax Consultancy
General Utility Functions
Locker Facility
Traveller’s Cheque
Letter of credit
Assumptions
Entire bommercial banking systen is one unit, termed as ‘Bank’
All the Reciepts & Payments are routed through Bank
Formula of Money Multiplier
1/LRR
LRR
Legal Reserve Ratio
Money Multiplier
A bank loans or invests its excess reserves to earn more interest
Central Bank
‘Apex Body’ that controls, regulates and directs the entire Banking & Money structure of the country
Such as : RBI, Federal Reserve, Bank of England
Currency Authority/Bank of Issue
RBI issues Currency except one rupee notes or coins
Bank to the Govt
Maintains a current a/c
Responsible for managing Public Debt
Advises the Government on various monetary matters
Banker’s Bank and Superviser
Custodian of cash reserves
Lender of last resort
Clearing house
Cutodian of Foreign Exchange
Acc. to Regulations of Foreing Exchange, transactions must be routed through RBI
Controller of Money Supply
Due to economic fluctuations, RBI controls money supply and credit
Repo Rate
Rate at which the RBI lends money to Commercial Bank. ST
Bank Rate
ate at which the RBI lends money to Commercial Bank. LT
Legal Reserve Requirement
Cash Reserve Ratio
Staturay Liquid Ratio
CRR
Money reserved by Commercial Banks in Central Bank
SLR
Money reserved by commercial banks in the form of cash or assets
Margin Requirement
The difference between the current value of the security offfered for loan
