UNIT 2 MONEY& BANKING.(EXAM ORIENTED)...

CBSE BOARD ORIENTED NOTES (ECONOMICS)FOR STUDENTS OF 12th STANDARD.
INSPIRED FROM CA PARAG GUPTA.
SUITABLE FOR ALL BOARDS.
THIS PPT IS BASED ON ECONOMICS CLASS 12th CBSE BOARD #NCERT WHICH HELPS STUDENTS TO SCORE THE BEST IN EXAMINATION....

1. CLASS 12 th MACROECONOMICS MONEY & BANKING By:ECOHUB https://ecohub03.wordpress.com/

2. BARTER SYSTEM : IT IS A SYSTEM IN WHICH GOODS ARE EXCHANGED BY GOODS. THE ECONOMY WHERE BARTER SYSTEM TAKES PLACE IS CALLED C-C ECONOMY* . * C-C (COMMODITY TO COMMODITY )

3. LIMITATIONS OF BARTER LACK OF DOUBLE COINCIDENCE OF WANTS . LACK OF COMMON MEASURE OF VALUE. LACK OF STORE OF VALUE. LACK OF STANDARD OF DEFERRED PAYMENTS(INSTALLMENTS).

4. FUNCTIONS OF MONEY

5. PRIMARY FUNCTIONS: (MAIN/BASIC) 1. MEDIUM OF EXCHANGE. (ACT OF SALE&PURCHASE IS POSSIBLE DUE TO MONEY ONLY) 2. MEASURE OF VALUE/ UNIT OF ACCOUNT . (ALL THE GOODS & SERVICES HAVE VALUE WHICH CAN BE MEASURED TODAY IN TERMS OF MONEY).

6. SECONDARY FUNCTIONS: (SUBSIDIARY/DERIVATIVE) 1.STORE OF VALUE (ASSET FUNCTION OF MONEY) (WEALTH CAN BE EASILY STORED) 2.STANDARD OF DEFERRED/FUTURE PAYMENTS (CREDIT TRANSACTION &INSTALLMENTS ARE NOW POSSIBLE).

7. MONEY MONEY IS WHAT MONEY DOES. IN SIMPLE WORDS,MONEY IS ANYTHING WHICH PERFORMS THE FOUR MAJOR FUNCTIONS . i.e. medium of exchange ,measure of value ,standard of deferred payments and store of value.

8. MONEY SUPPLY :SUPPLY OF MONEY REFERS TO TOTAL STOCK OF MONEY HELD BY PEOPLE OF A COUNTRY AT A PARTICULAR POINT OF TIME. :IT IS A STOCK CONCEPT. :SINCE GOVERNMENT AND THE BANKS ARE PRODUCERS (supplier) OF MONEY .THEREFORE STOCK OF MONEY HELD BY THEM IS NOT INCLUDED IN MONEY SUPPLY.

9. PRINCIPAL COMPONENTS OF MONEY SUPPLY : *CURRENCY&(COINS) HELD BY PUBLIC. *DEMAND DEPOSITS (excluding inter bank deposits) OF PEOPLE WITH COMMERCIAL BANKS. *OTHER DEPOSITS WITH RBI (RESERVE BANK OF INDIA) i.e.IMF,NABARD,WORLD BANK.

10. MEASUREMENT OF MONEY SUPPLY: ( TRANSACTION MONEY)M1= C+DD+OD =CURRENCY NOTES&COINS HELD BY PUBLIC +DEMAND DEPOSITS (excluding inter bank deposits) +OTHER DEPOSITS WITH RBI.

11. BANKS COMMERCIAL BANKS( PRIMARY UNIT) IT IS A FINANCIAL INSTITUTION WHICH ACCEPTS DEPOSITS AND GIVE LOANS WITH THE AIM OF EARNING PROFITS. DEALS WITH GENERAL PUBLIC. PROFITS ARE GENERATED BY WAY OF SPREAD . i.e. Difference b/w Rate of lending and Rate of deposits. EXAMPLE: SBI,PNB,ICICI,HDFC etc.

12. CENTRAL BANKS IT IS AN APEX INSTITUTION OF MONETARY&BANKING SYSTEM OF A COUNTRY. RESERVE BANK OF INDIA(RBI) IN INDIA.

13. LEGAL RESERVE RATIO (LRR) LRR IS THE MINIMUM RATIO OF THE DEPOSITS WHICH EVERY COMMERCIAL BANK HAS TO KEEP AS ‘ CASH RESERVES ’.

14. LRR CAN BE OF TWO TYPES: *CASH RESERVE RATIO (CRR): IT IS A SPECIFIED MINIMUM FRACTION OF THE TOTAL DEPOSITS OF CUSTOMERS ,WHICH COMMERCIAL BANK HAVE TO KEEP WITH CENTRAL BANK . (fixed by central bank to control credit creation ) *STATUTORY LIQUIDITY RATIO (SLR): IT REFERS TO PROPORTION OF TOTAL DEPOSITS WHICH COMMERCIAL BANK HAS TO KEEP WITH ITSELF IN THE FORM OF LIQUID ASSESTS. i.e. cash ,gold .unencumbered approved securities.

15. CREDIT CREATION

16. ASSUMPTIONS: *THE ENTIRE COMMERCIAL BANKING SYSTEM IS ONE UNIT AND TERMED AS BANK. *ALL THE TRANSACTIONS(receipts and payments) ARE ROUTED THROUGH BANK ONLY.

17. PROCESS *CREDIT CREATION IS DETERMINED BY TWO FACTORS: =INITIAL DEPOSIT =LRR *SUPPOSE LRR=20% AND THERE IS A FRESH DEPOSIT OF Rs.10000 NOW BANK KEEPS Rs.2000 AS A CASH RESERVE & LENDS THE REMAINING Rs.8000 TO THE BORROWERS . *SUPPOSE THE BORROWERS SPEND THE ENTIRE AMOUNT OF Rs.8000 FOR MAKING PAYMENTS .SINCE ALL THE DIRECTIONS ARE ROUTED THROUGH BANK THE MONEY SPEND BY BORROWERS COMES BACK INTO THE BANK IN THE FORM OF DEPOSITS OF THOSE WHO RECEIVE THIS PAYMENT. *NOW BANK AGAIN KEEPS 20% i.e. Rs.1600 AS CASH RESERVE AND LEND Rs.6400 TO OTHER BORROWERS. THIS PROCESS WILL KEEP ON REPEATING TILL SECONDARY DEPOSITS BACOME ZERO. ( total of cash reserves=initial deposits).

18. MATHEMATICALLY: - TOTAL MONEY CREATION= INITIAL DEPOSIT* 1/LRR -MONEY MULTIPLIER = 1/LRR * 100 (INVERSE OF LRR)

19. FUNCTIONS OF CENTRAL BANK

20. BANK OF ISSUE: *THE MOST IMPORTANT FUNCTION OF CENTRAL BANK IS THE FUNCTION OF ISSUE OF CURRENCY . *CENTRAL BANK IN EVERY COUNTRY HAS THE SOLE AUTHORITY TO ISSUE CURRENCY NOTES. *CENTRAL BANK IS OBLIGED TO BACK THE CURRENCY WITH ASSETS SUCH AS GOLD , FOREIGN SECURITIES etc. *(In India , one rupee notes& coins are issued by MINISTRY OF FINANCE).

21. BANKER TO THE GOVERNMENT: *AS A BANKER TO THE GOVT. CENTRAL BANK MAKES & RECEIVES PAYMENTS ON BEHALF OF GOVERNMENT. *AS AN AGENT , CENTRAL BANK CONDUCTS SALE & PUSCHASE OF GOVERNMENT SECURITIES. *IT ALSO ACTS AS AN ADVISOR TO THE GOVERNMENT , SPECIALLY ON MONETARY ,BANKING, & FINANCIAL MATTERS.

22. BANKER’S BANK & SUPERVISOR: *RBI SUPERVISES AND MONITORS ALL THE COMMERCIAL BANKS IN THE COUNTRY. *RBI ALSO GIVE THEM GUIDELINES DURING INFLATIONARY &DEFLATIONARY SITUATIONS , WHICH EVERY COMMERCIAL BANK HAS TO FOLLOW.

23. CUSTODIAN OF NATIONAL RESERVES OF INTERNATIONAL CURRENCY: *THE CENTRAL BANK IS THE CUSTODIAN OF THE COUNTRY’S GOLD & INTERNATIONAL CURRENCIES . *ALL THE RECEIPTS AND PAYMENTS IN FOREIGN EXCHANGE ARE MADE BY CENTRAL BANK.

24. LENDER OF LAST RESORT: *IT MEANS WHEN COMMERCIAL BANKS FAILS TO MEET THEIR FINANCIAL REQUIREMENTS THEN THEY CAN APPROACH CENTRAL BANK FOR LOANS & ADVANCES . *SOMETIMES COMMERCIAL BANKS HAVE TO MEET EXTRA DEMAND OF THEIR CUSTOMERS FOR READY CASH . CENTRAL BANK ACT AS LENDER OF LAST RESORT IN THIS KIND OF EMERGENCY.

25. QUANTITATIVE METHOD CREDIT CONTROL: ( MOST IMP FUNCTION OF CENTRAL BANK IS TO ACTS AS A CONTROLLER OF CREDIT). *BANK RATE : THE RATE OF INTEREST AT WHICH COMMERCIAL BANKS TAKES LONG TERM CREDIT FROM CENTRAL BANK. *REPO RATE: THE RATE OF INTEREST AT WHICH COMMERCIAL BANKS TAKES SHORT TERM CREDIT FROM CENTRAL BANK. *REVERSE REPO RATE: THE RATE OF INTEREST AT WHICH COMMERCIAL BANKS PARKS THEIR SURPLUS FUNDS WITH THE CENTRAL BANK.

26. *OPEN MARKET OPERATIONS: SALE OF GOVERNMENT SECURITIES TO THE COMMERCIAL BANKS REDUCES THE CASH RESERVES WITH THE BANKS RESULTING IN DECLINE OF MONEY SUPPLY. *CRR/SLR: INCREASE IN CRR/SLR REQUIREMENTS BY RBI DECREASES THE LENDING CAPACITY OF COMMERCIAL BANKS . RESULTING , DECREASES IN MONEY SUPPLY IN THE ECONOMY.

27. QUALITATIVE METHOD MARGIN REQUIREMENT: THE DIFFERENCE BETWEEN THE CURRENT VALUE OF THE SECURITY OFFERED FOR LOAN (collateral) AND THE VALUE OF LOAN GRANTED.

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