Functions and Classification of Money

Outcome is to understand the Concept of Money and its Functions and Classifications.

1. MONEY & BANKING Sri Krishna Arts and Science College Department of Commerce Faculty:Mrs. S. Akhila

2. Attendance and Snap talk

3. Modular Assessment Code E (Theory –Skill Based )

4. UNIT-I MONEY MONEY & BANKING

5. Agenda Learning Objectives Expected Outcome Key terms Summary Test your knowledge (MCQ) Introduction to next session

6. Learning Objectives Money : Functions and Classifications

7. Expected Outcome The outcome of this session is to understand the Concept of Money and its Functions and Classifications.

8. Functions of money

9. Functions of money

10. Functions of money: Primary functions Medium of exchange Unit of account Secondary functions Store of value Standard of deferred payments Easy transfer of value

11. Primary functions: Medium of exchange Generally acceptable. Removed the needs of double coincidence of wants. Remove the difficulties of barter system. Make transaction on time at any place. Works as intermediary between labor and production to increase output. Unit of account Standard monetary unit for measurement of goods services and assets. It is a common denominator which determines the rate of exchange between goods and services. It is used to check profit , loss and liabilities.

12. Secondary functions: Store of value: Stan d ard o f defer r e d payments: Transfer of value: Works as bridge between present and future value of wealth . It is used to meet unforseen emergency and to pay debt . Equally chances of gain and loss because it is included bonds securities commercial papers. Debt are easily return back with the same value of money Make possible contracts for goods and services against the bond and securities Fixed debt contracts eliminate the gain or loss of creditor and debtor. Money has ability to transfer value one person to other person easily at any place.

13. Classification of money

14. Classification of money

15. Classification of money Broadly, money can be classified as: ( i ) Full Bodied money; (ii) Representative Full bodied money; and (iii) Credit money. Money can be classified on the basis of relationship between the value of money as money and the value of money as a commodity.

16. ( i ) Full bodied Money: Any unit of money, whose face value and intrinsic value are equal, is known as full bodied money, i.e. Money Value = Commodity Value. For example, during the British period, one rupee coin was made of silver and its value as money was same as its value as a commodity. Classification of money ( ii) Representative Full-bodied Money: It refers to money which is usually made of paper. The value of representative full-bodied money is much higher than its value as a commodity. It is accepted as money as it can be conveniently used for carrying out transactions.

17. Classification of money Two Kinds of Representative Money: A. Convertible Paper Money: It refers to the currency notes which are freely convertible into full-bodied money (gold or silver) at any time at the option of the holder. B. Inconvertible Paper Money: It is that kind of paper money which cannot be convertible into full-bodied money at the option of the holder. However, it circulates and commands value as its issue is regulated by a responsible government. This money does not have any backing of standard coins or bullion. Indian one-rupee note is a good example of inconvertible paper money.

18. Classification of money (iii) Credit Money: Credit money refers to the money whose intrinsic value (as a commodity) is much lower than its face value i.e. Money Value > Commodity Value. For example, face value of Rs 100 note is Rs 100, but we would get a much lower value if we sell the note as a piece of paper. Credit cards, bank deposits are other examples of credit money.

19. Classification of money The various forms of credit money are: (a) Token coins: These refer to small coins of various denominations, which are issued to facilitate day-to-day requirements of the people. All Indian coins, like those of Rs 10, 5, 2 or 1, are token coins since their value as money is more than value of metal contained in them. (b) Representative Token money: It is 100% backed and is fully redeemable in some commodity such as gold or silver. It is generally in the form of paper and market value of what is actually offered is less than value printed on paper notes.

20. Classification of money (c) Circulating promissory notes issued by central bank: These are currency notes issued by Reserve Bank in India. These include all currency notes of denominations like Rs 1,000, Rs 500, Rs 100, etc. Each promissory note contains the words, “I promise to pay the bearer the sum of Rs…………. “, and is signed by the Governor of India. The commodity value of a promissory note is much less than its money value.

21. Format of a Promissory Note

22. (d) Demand Deposits in bank: Deposits are claims of creditors (depositors) against bank. These deposits can be withdrawn from the bank or transferred from one person to another by issuing a cheque . Such deposits do not have backing in terms of any bullion (gold or silver). The commodity value of a cheque is much lower than its money value. Demand deposits are very convenient for making transactions of huge amounts as they remove the risk of carrying large amounts of cash. Classification of money

23. Key Terms Full Bodied money Representative Full bodied money Credit money Medium of Exchange Unit of account Store of value Paper Money promissory notes Token coins Demand Deposits

24. Summary Unit Of Account -Standard monetary unit for measurement of goods services and assets. Medium of Exchange: Works as intermediary between labor and production to increase output. Store of Value: Works as bridge between present and future value of wealth. Transfer value- Money has ability to transfer value one person to other person easily at any place. Representative money -Slip issued against commodities and metals which was used as money.

25. Summary Any unit of money, whose face value and intrinsic value are equal, is known as full bodied money It refers to money which is usually made of paper. The value of representative full-bodied money is much higher than its value as a commodity . Convertible Money: It refers to the currency notes which are freely convertible into full-bodied money (gold or silver) at any time at the option of the holder. Inconvertible Paper Money: It is that kind of paper money which cannot be convertible into full-bodied money at the option of the holder.

26. MCQ ???????

27. 1. Currency notes and coins are called as:? a) Flat money b) Legal tenders c) Fiat money d) Both b and c (d) Both b and c MCQ ???????

28. 2. Which among the following is considered to be the most liquid asset? a) Gold b) Money c) Land d) Treasury bonds (b) Money MCQ ???????

29. 3. Anything used as money must be: a) Fixed in value b) Fixed in supply c) Legal tender d) Readily acceptable (d) Readily acceptable MCQ ???????

30. 4. Which is NOT a desirable characteristic of money? a) Portable b) Uniform c) Easily recognised d) Easily duplicated (d) Easily duplicated MCQ ???????

31. 5. What possess general acceptability? a) Bank draft b) Money c) Bill of exchange d) Commodity Exchange (b) Money MCQ ???????

32. Characteristics of money Next Hour-

33. Characteristics of Money ? Important Characteristics of Money are : Durability Portability Divisibility Uniformity Limited Supply Acceptability

34. Thank You SKASC-Department of Commerce BPS & CM