Money and Credit-1 Flashcards
why transactions are made in money?
A person holding money can easily
exchange it for any commodity or
service that he or she might want.
Thus everyone prefers to receive
payments in money and then
exchange the money for things that
they want.
what is double coincidence of wants
When in the exchange, both parties agree to sell and buy each other commodities. It is called double coincidence of wants.What the other person desires to sell is what the other wishes to buy.
explain the difference between use of money and barter system using ang example
He wants to sell shoes
in the market and buy wheat. The
shoe manufacturer will first exchange
shoes that he has produced for
money, and then exchange the money
for wheat. Imagine how much more
difficult it would be if the shoe
manufacturer had to directly
exchange shoes for wheat without the
use of money. He would have to look
for a wheat growing farmer who not
only wants to sell wheat
but also wants to buy the
shoes in exchange.
define barter sisytem
When goods are directly exchanged and there is no use of money, It is called barter system.
how does money act as a medium of exchange.
Money acts as a medium of exchange as it acts as an intermediate in the exchange process and transactions. Buying and selling of commodities are done with the exchange of money.
list the limitations of barter system
The condition of double coincidence must be fulfilled for barter.
Difficulty in accumulating wealth or value.
Difficult to exchange indivisible goods.
Difficult to store things for future use (for a long time).
what were the ancient forms of money
Before
the introduction of coins, a variety of
objects was used as money. For
example, since the very early ages,
Indians used grains and cattle as
money. Thereafter came the use of
metallic coins — gold, silver, copper
coins — a phase which continued well
into the last century.
list moddrn forms of money
Modern forms of money include
currency — paper notes and coins.
Net banking Mobile banking
Paper Notes
Debit Cards
Credit Cards
Cheque
why is it accepted as a
medium of exchange?
It is accepted
as a medium of exchange because the
currency is authorised by the
government of the country.
who issues currency on behalf of indian govt in india
In India, the Reserve Bank of India
issues currency notes on behalf of the
central government.
explain the statement ‘ money is widely accepted as a medium of exchange’
As per Indian
law, no other individual or
organisation is allowed to issue
currency. Moreover, the law legalises
the use of rupee as a medium of
payment that cannot be refused in
settling transactions in India. No
individual in India can legally refuse
a payment made in rupees. Hence,
the rupee is widely accepted as a
medium of exchange
What do people do with
this extra cash?
They deposit it with
the banks by opening a bank
account in their name.Banks accept
the deposits and also pay an amount
as interest on the deposits. In this way
people’s money is safe with the
banks and it earns an amount as
interest.
why are bank deposits called demand deposits
People also have the
provision to withdraw the money as
and when they require. Since the
deposits in the bank accounts can be
withdrawn on demand, these
deposits are called demand deposits.
explain the method of payment by cheque
For payment through cheque, the
payer who has an account with the
bank, makes out a cheque for a
specific amount. A cheque is a
paper instructing the bank to pay
a specific amount from the
person’s account to the person in
whose name the cheque has been
issued.
how do demand deposits share the essential features of moneyu
The facility of cheques against demand
deposits makes it possible to directly
settle payments without the use of cash.
Since demand deposits are accepted
widely as a means of payment, along
with currency, they constitute money
in the modern economy.
Demand deposits offer another
interesting facility. It is this facility
which lends it the essential
characteristics of money (that of a
medium of exchange).
What do the banks do with the
deposits which they accept from the
public?
Banks keep
only a small proportion of their
deposits as cash with themselves. For
example, banks in India these days
hold about 15 per cent of their
deposits as cash.
why is this small proportion of cash held by banks
This is kept as
provision to pay the depositors who
might come to withdraw money from
the bank on any given day. Since, on
any particular day, only some of its
many depositors come to withdraw
cash, the bank is able to manage with
this cash.
what do banks do with the major proportion of their loans
Banks use the major portion of the
deposits to extend loans. There is a
huge demand for loans for various
economic activities.Banks make use of the deposits to
meet the loan requirements of the
people. In this way, banks mediate
between those who have surplus
funds (the depositors) and those who
are in need of these funds (the
borrowers).
how do banks get income
Banks charge a higher
interest rate on loans than what they
offer on deposits. The difference
between what is charged from
borrowers and what is paid to
depositors is their main source of
income
