Plastic money

unit of value 

money itself is medium of exchange

Money serves as a measure of value in terms of unit of account. Measurement of value was the main difficulty of the barter system. Introduction of money has removed this difficulty. It acts as a yardstick of standard measure of value to which all other things can be compared. Money measures the value of everything or the prices of all goods and services can be expressed in terms of money. This function of money also enables the trading firms to ascertain their costs, revenues, profits and losses.

Money is a dynamic factor because:
(i) It has facilitated exchange beyond limits.
(ii) It has facilitated accumulation of wealth for the purpose of investment.
(iii) It has facilitated flow of capital from one place to other and from developed countries to less developed countries of the world.
Brifely, money is a dynamic factor because it helps economic stability and promotes the process of growth and developement.

It refers to those payments which are to be made in future.Money is accepted as a standard of deferred payments because:

(i) Its price remains relatively stable.

(ii) It has general acceptability.

(iii) It is more durable as compared to other commodities.

A commercial bank is considered a 'creator of money' in the economy on the basis of its basic function of receiving/accepting deposits from the public. The commercial banks use the money in these deposits to give loans. This is the basis of deposit creation. How much is the deposit creation is determined by the amount of initial deposits by the public and the Legal Reserve Ratio (LRR). Let us now explain the process of money creation/deposit creation or credit creation. Suppose initially people deposit Rs 100. The banks use this money for giving loans. But the banks cannot use the whole of the deposit for this purpose. It is legally compulsory for the banks to keep a certain minimum fraction of these deposits as cash. This fraction is called the Legal Reserve Ratio (LRR), which is fixed by the central bank. The part ratio which is kept by the commercial banks with the central bank is called Cash ReserveRatio (CRR). The other part which is kept by the banks themselves is called the Statutory Liquidity Ratio (SLR). Explanation of the process of money creation. Suppose the initial deposit in banks is Rs 100and the LRR is 20%. Further suppose that banks keep only the minimum required, i.e., Rs 20 as cash reserve. So now they are free to lend the remainder Rs 80. Suppose they lend ~ 80, for this, they open deposit accounts in the names of the borrowers Now, as all the transactions are routed through the banks, the money spent by the borrowers comes back into the banks, into the deposit accounts of those who have received this payment. This increases demand deposits in banks by Rs 80, which is 80% of the initial deposit. This deposit of Rs 80 has resulted on account of loans given by the banks. In this sense, the banks are responsible for money creation with this round, increase in total deposits is now Rs180  (l00 + 80). This way, the deposits go on increasing round after round, but each time 80% of the last round deposit. At the same time, cash reserves go on increasing each time, 80% of the last cash reserve. The deposit creation comes to end when total cash reserves become equal to the initial deposit (i.e., Rs 100 in the given case) the total deposit creation comes to Rs 500, i.e., five times the initial deposit as proven by the following schedule.

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

'Lender of Last Resort' means that when the commercial banks are in difficulty, Central Bank can make advances to them when temporarily in need of funds.

i) It ensures uniformity in note circulation
ii) It builds up public faith in the currency system
iii) It enables government to control money supply through RBI

a) Search cost, which is the cost of searching a person, to exchange goods and
b) Disutility of waiting, which means cost of equivalent to wastage of time period spent on finding out required person.

The bank rate policy should be preferred by the RBI because the policy of open market operations cannot be used effectively in our country.

Instruments of monetary policy of the central bank are broadly classified as:
(i) Quantitative Instruments
(ii) Qualitative Instruments
(i) Quantitative Instruments  of monetary policy focus on the overall supply of money in the economy. These instruments relate to two policy rates and two policy ratios. The policy rates are (i) Bank rate (ii) Repo rate
The two policy ratios are (i) CRR (ii) SLR.
(ii) Qualitative Instruments of monetary policy are those instruments which focus on selected sectors of the economy. The banks are advised to be selective in offering loans, specially when the economy is gripped in the inflationary spiral.

Legal tender refers to money which has the power to discharge debt obligations, and a creditor cannot refuse to accept it in return for his credit. Fiat money is any money that is under the fiat or order from the government to act as money.