Chapter 3 Notes MONEY & CREDIT
By Abhiram Mohan
Money as a Medium of Exchange
1. Daily Transactions Involving Money
Money is used in many daily transactions.
Examples: buying/selling goods, paying for services.
Sometimes transactions involve a promise to pay later.
2. Why Use Money?
Money is easily exchangeable for any commodity or service.
People prefer receiving money to exchange it for their desired goods or services.
3. Example of a Shoe Manufacturer
Sells shoes for money.
Uses money to buy wheat.
Without money, direct barter would be complicated.
4. Double Coincidence of Wants
In barter, both parties must want each other's goods.
This mutual need is called double coincidence of wants.
5. Role of Money in Eliminating Double Coincidence of Wants
Money removes the need for direct exchange.
Simplifies transactions by acting as an intermediate step.
Seller can sell goods for money and use money to buy any other goods.
6. Money as an Intermediate
Money facilitates exchange by being a medium.
Eliminates the need to find a direct match for goods exchange.
Modern Forms of Money
1. Evolution of Money
Early forms: Grains, cattle.
Metallic coins: Gold, silver, copper.
2. Currency
Modern Currency: Paper notes and coins.
Characteristics:
o Not made of precious metals.
o No intrinsic value or everyday use.
Acceptance:
o Authorized by the government.
o Issued by the Reserve Bank of India (RBI).
o Legally recognized for transactions in India.
o Cannot be refused for payments in rupees.
3. Deposits with Banks
Purpose: Safe storage of excess cash.
Interest: Banks pay interest on deposits.
Withdrawal: Money can be withdrawn on demand.
4. Demand Deposits
Definition: Bank deposits that can be withdrawn on demand.
Medium of Exchange:
o Facilitates transactions like cash.
o Payments can be made using cheques.
5. Cheques
Function: Written instruction to the bank to pay a specific amount from the payer’s account.
Use: Common method for non-cash payments.
