Central bank keeps the cash balances of commercial banks and issues loans to them on requirements, in the same manner as the commercial banks do for its customers.
A central bank has almost the same relation with the other commercial banks have with the common public. That is why the central bank is also called as banker' bank.

It refers to the creation of demand deposits with the commercial banks on the basis of their cash reserves. often the deposits are created many times more than the cash reserves.This is based on historical experience of the banks that cash withdraw of funds is only a small percentage of total demand deposits

e.g. if against the cash reserve of rs 100, demand deposit  of rs1000 is created. it is called credit creation by a multiple of 10 or 10 is treated as credit multiplier which is equal to \(\frac { 1 }{ LRR } \)

Money value of money refer to what is inscribed on a coin or written in paper note. Thus, money value of paper note is what is written on it. i.e. Rs.100. Rs 500, etc. You can buy a goods and service worth of that amount in the market. commodity value of money refers to value of the material out of which coins or currency notes are made.

Static function of money refer to conventional function of money. They basically include the primary ans secondary functions of money. viz medium of exchange, measure of value, store of value, transfer of value and standard of deferred payments.

The difference between money and high powered money lies in the fact that the former consists of currency and demand deposits and the later consists of currency and cash reserves with the bank.High powered money is also known as 'monetary base'.

Money multiplier measures the amount of money that the banks are able to create in the form of deposits with every unit of money, it keeps in reserves.
It is calculated as:
\(Money\quad Multiplier=\frac { 1 }{ Legal\quad Reserve\quad Ratio } \) 
Cash Reserve Ratio(CRR) and statutory liquidity Ratio(SLR) play an important role in the determination of money multiplier.

The total stock of money in circulation among the public at a particular point of time is called money supply.Money supply is a stock variable.RBI publishes figures for four alternative measures of money supply, viz,\({ M }_{ 1 },{ M }_{ 2 },{ M }_{ 3 }\)
They are defined as, \({ M }_{ 1 }=CU+DD\) 
Where \(CU\)is Currently(notes plus coins) held by the public and DD is net Demand Deposits held by commercial banks The word  'net' implies that only deposits of the public held by the banks are to be included in money supply. The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of money supply.
\({ M }_{ 2 }={ M }_{ 1 }+\) Savings deposits with post office savings banks
\({ M }_{ 3 }={ M }_{ 1 }+\)Net time deposits of commercial banks

\(​​\)\({ M }_{ 4 }={ M }_{ 3 }+\) Total deposits with post office savings  organisations(excluding National Savings Certificates)

Following are the main functions of money:

(i) Medium of exchange it is a very important and main function of money.Any commodity can be purchased or sold through the medium of money.In other words, money becomes the representative of general purchasing power.It is the function of money which has made the work of exchange easy because money has the merit of general acceptability.

(ii) Measure of value money serves as a common measure of value or a standard of value.Value of all goods and services are expressed in terms of money.e.g.the price of a pen as Rs 5, the price of a book as Rs 10, etc.It is also referred to as unit of an account function of money.

(iii) Store of value Wealth can be conveniently stored in the form of money remains relatively stable, compared to other commodities and storage of money does not need much space.In other words, everybody saves some part of his income to fulfil the various objectives of the future, it is known as store of value.

(iv) Standard of deferred payments Money serves as the measure by which the value of future payments is regulated.In modern economic system, loans are generally given and taken and the repayment is generally postponed for a future date.Money has made such transactions easy.

Money overcomes the problem of barter system by replacing the C-C economy with monetary economy(where 'C' stands for commodity).
(i) In the barter system, there was a problem of double coincidence of wants.It was difficult to match the expectations of two different individuals.thus, money was invented to overcome the problem of double coincidence of wants.
(ii) When there was no money, it was difficult to give common unit of value to goods or commodities, but when money was evolved, it gave a common unit of value to every goods and service.
(iii) Money facilities the contractual future payments which were impossible at the time of barter system.

Double coincidence of wants barter system can only work, when both the persons are ready to exchange each other's goodsBut usually this type of double coincidence is rare to find.
Money eliminates the problem of double coincidence of wants as, the buyer and sellar both exchange goods or services for money.It facilities exchanges of goods and services and helps in carrying on trade smoothly.

The primary function of money is acting as s medium of exchange berween two parties involved in a transaction.It avoids the practical problems of wastage of time and resources, involved with the barter system of exchange and it improves the transactional efficiency.it also promotes allocational efficiency in the trade and production of goods and services. 

Money serves as a unit of value or common measure of value in terms of which the value of all goods and services are measured.This helps in measuring the exchange values of commodities.The prices of all the goods and services can be fixed in terms of money and the problem of expressing of the value of each commodity in terms of quantities of other goods can be avoided. 
This function of money makes it possible to keep business accounts.It would not be possible to keep business account unless all business transactions are expressed in terms of money.

The Central Bank performs the following important functions:
(i) Issue of Currency Authority. The Central Bank is the sole authority for the issue of currency in the country. Notes issued by it are circulated as legal tender money. It has its issue department which issues notes and coins. Coins are manufactured in the government mint but they are put into circulation through the Central Bank. While issuing currency notes, a minimum fixed amount of gold and foreign currencies is kept by the Central Bank. The monopoly of issuing notes vested in the Central bank ensures uniformity in the notes issued which helps in facilitating exchange and trade within the country. By having a monopoly of note issue, the Central Bank can restrict or expand the supply of cash according to the
 requirements of the economy.
(ii) Banker to the government. The Central Bank acts as a banker to the government in various respects: (a) The Central Bank accepts receipts and makes payment for the government and carries out exchange, remittance and other banking operations (b) It provides short-term credit to the government (c) It provides foreign exchange to the government to repay external debt (d) It manages public debt, i.e., to manage all new issues of government loans (e) It advises the government on banking and financial matters.
(iii) Banker's bank and supervisor.The Central Bank acts as a banker and supervisor to commercial banks in various respects (a) It provides financial assistance to banks by discounting their bills and through loans and advances against approved securities (b) The commercial banks are required to maintain a certain percentage of liabilities with the Central Bank. The sole aim of these reserves is to enable the Central Bank to provide financial assistance in times of financial emergency (c) It supervises, regulates and controls the activities of commercial banks (d) It provides the commercial banks with centralised clearing and remittance facility.
(iv) The Central Bank performs the function of "controller of credit". Supply of credit must be controlled so as to ensure the smooth functioning of the economy. For this purpose, Central Bank adopts quantitative and qualitative methods of credit control. Quantitative methods such as bank rate, open market operations, variable reserve ratio aim at controlling cost and availability of credit while the qualitative methods such as margin requirements, direct action, rationing of credit and moral suasion influence the use and direction of credit.
(v) Lender of the last resort. The Central Bank acts as a lender of the last resort for commercial banks. When commercial banks fail to meet obligations of their depositors, the Central Bank comes to their rescue. The Central Bank advances necessary credit against eligible securities subject to certain terms and conditions. This saves banks from a possible breakdown. The Central Bank supervises, regulates and controls the commercial banks. The regulation of banks may be related to their licensing, branch expansion, liquidity of assets, management, amalgamation and liquidation. The control is exercised by periodic inspection of banks .and the returns filed by them.

The primary function of commercial banks is money creation in an economy. By the historical experience of commercial banks, they know that the deposits would not be withdrawing all of their funds at a particular time.
That is why they create credit in the form of much higher demand deposits than their cash reserves. commercial banks issue loans on the basis of their demand deposits, even if a fraction of the amount is with them as cash reserves.
That is why they create credit in the form of much higher demand deposits than their cash reserves. commercial banks issue loans on the basis of their demand deposits, even if a fraction of the amount is with them as cash reserves.
In this way, they contribute to increase the flow of money in an economy by the process of credit creation. e.g. suppose a bank has a credit reserve of rs 1500 and demand deposits of rs 12000. it means the bank is creating credit of 8 times of 1/5 cash reserve if the withdrawals are 12.5% of the deposits, the bank needs to keep only 12.5% of its total deposits as cash (CRR).

Here<    Demand deposits=\(\frac { 1 }{ CRR } \times \) cash reserve
or
                 Demand deposits=\(\frac { 1 }{ 12.5 } \times \)1500=rs 12000
Now, the bank can issue loans to its customers on the basis of these demand deposits, as loans are never offered in cash, but only as demand deposits in favour of the customer. suppose, the bank issue loan of rs 10500 to its customer keeping rs 1500 as cash reserve. now, this loan is also with the bank as demand deposits. again, the bank keeps 12.5% of this rs 10500 and can give rs 9187.5 to its customers as loan.
Thus, the money goes on multiplying and create new flow of money in the economy.
The total credit creation by this bank can be obtained by the following formula:
Total credit/money creation=initial deposit\(\times \frac { 1 }{ LRR } \) =12000\(\times \frac { 1 }{ 12.5% } \)= rs 96000