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Assessment 2 - Lesson Plan PP

Session 1 provides an overview of money and banking topics including the functions of money, demand and supply of money, credit creation by commercial banks, and tools to control money supply. The session includes a discussion on why the barter system failed, a video explaining money and banking concepts visually, and details on money, its supply and demand, narrow and broad definitions of money supply, and how commercial banks create credit through lending. The session concludes with assessment activities like essay questions, one-minute writing prompts, and multiple choice questions.

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0% found this document useful (0 votes)
147 views24 pages

Assessment 2 - Lesson Plan PP

Session 1 provides an overview of money and banking topics including the functions of money, demand and supply of money, credit creation by commercial banks, and tools to control money supply. The session includes a discussion on why the barter system failed, a video explaining money and banking concepts visually, and details on money, its supply and demand, narrow and broad definitions of money supply, and how commercial banks create credit through lending. The session concludes with assessment activities like essay questions, one-minute writing prompts, and multiple choice questions.

Uploaded by

Zaria Tariq
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Session- 1

Money and Banking


Overview of the session (Sub-topics)
● Introduction and discussion on money
● Visual explanation: Storyboard on Money and Banking
● Functions of money
● Demand for money and supply of money
● Liquidity motives- Transaction, speculative
● Credit creation by the Commercial banks
● Policy tools to control money supply in the economy
● Assessment- Essay-type questions, one- minute writing, MCQs
Speaking
Activity
Warmer Activity- Discussion on money and banking
● Why did the barter system fail?

[Hint: Because it depended on “The Double coincidence of wants”,


indivisibility of commodities]

● Is it possible now to implement a barter system in the world as a means


of exchange instead of money? Explain why/why not.
● Why do you think money is essential for the smooth running of the
economy?
● Do you think our economy could run without the RBI(Central bank)?
Curious to learn more
about the topic??
Let’s Watch a video….
Visual Explanation of Money and banking

Banking Storyboard: Story of mo


ney and credit
[Click on the link to play]
Listening/Reading
Activity:
Consolidate your
knowledge by learning in
detail
Let’s learn about Money and Banking in detail
Introduction to money

According to Geoffrey Crowther “Money is anything that is generally accepted as a means of exchange and, at the same time, acts as a
measure and store of value.”

This definition emphasises all the three main functions of money, viz

-Medium of exchange: Anything that is generally acceptable as a means of payment or medium of exchange is known as money. Money
holds general purchasing power which can be used anytime to make payments.

-Measure of value: Money is used to measure the value of goods and services in monetary units. It acts as a convenient unit of account.

-Store of value: Money is used to store value and can be used anytime to buy goods or services. It can be stored for future use and to
make deferred payments.
Supply of Money
Money supply refers to the stock of money held by the public at a given point of time as a means of
payments and as a store of value.

Important to note facts about money supply:

- Money supply means the money held by the ‘public’ in a country. It is the money in circulation in the
country. The term public refers to all economic units such as individuals, private firms and business
institutions.

-It doesn’t include the producers of money, which means the Government, RBI and the commercial banks.

- The currency held by the government in its treasury and the money with the central and commercial banks
are not included in the supply of money.

- Money is a stock concept hence it is measured at a point in time, for example, Money in circulation in India
on 23rd December 2021.
Narrow and broad money
The total stock of money in circulation among the people at a particular point of time is called money supply. RBI
publishes figures for four alternative measures of money supply, viz. M1, M2, M3, M4. They are defined as
follows-

M1= CU+DD

M2= M1+ Savings deposits with the post office savings bank

M3= M1+Net time deposits of commercial banks

M4= M3+ Total deposits with post office savings organisation (excluding National Savings Organisation)

Where,

CU is notes plus coins, held by the public,

DD is the net demand deposits by the commercial banks,

‘Net’ implies that only deposits of the public held by the banks are to be included in the money supply.

M1 and M2 are known as narrow money whereas, M3 and M4 are known as Broad money.
Demand for Money
The demand for money tells us what makes people desire a certain amount of money. People want money for
various motives such as-

● Transaction motive- The value of this shows how much money people want to spend
● Liquidity motive - Value of liquidity motive shows how much money people want to save for contingencies
or emergencies.
● Speculative motive- Total value of the speculative motive shows how much money people are ready to invest
for speculation purposes.

Since money is demanded by people to conduct transactions, therefore, the value of transactions will
determine the money people want to keep. Since the quantum of transactions to be made depends on income,
a rise in the income of people will lead to a rise in demand for money.
Fig: Graph showing the speculative demand for money
What is high-powered money?

The money of the central bank is sometimes called High-powered money because the overall supply
of money in the economy depends on the amount of central bank money( Money issued by the central
bank). The central bank has direct control over the High-powered money which means that an
increase in the central bank money( currency issued) leads to more than a one-for-one increase in the
overall supply of money.
Credit creation by Commercial banks
The reserves of commercial banks(public deposits held by the commercial banks) are the secondary source of
money supply in an economy. The most important function of a commercial bank is the creation of credit.

Money supplied by commercial banks is called credit money. Commercial banks create credit by advancing loans
and purchasing securities. They lend money to individuals and businesses out of deposits accepted from the public.
However, commercial banks cannot use the entire amount of public deposits for lending purposes. They are
required to keep a certain amount as a reserve with the central bank for serving the cash requirements of depositors.
After keeping the required amount of reserves, commercial banks can lend the remaining portion of public deposits
as loans and advances.
For example- You deposit Rs. 10,000 in bank Z, which is the primary deposit of the bank. The cash reserve
requirement of the central bank is 10%. In such a case, bank Z would keep Rs. 1000 as a reserve with the central
bank and would use the remaining Rs. 9000 for lending purposes.

But banks do not advance loans or provide overdraft facilities in the form of cash. What banks actually do is that
they open a current account in the name of the borrower and allow him to withdraw the required sum by cheques
and in this way they create derivative deposits.

Thus, banks increase the volume of demand deposits without any decrease in the availability of currency with the
public. Hence, derivative deposits increase the total amount of money supply in the economy. In this way,
commercial banks can extend loans and advances by an amount that is many times more than the cash they get in
the form of primary deposits.
Policy tools to control Money Supply
Central banks have four main monetary policy tools to control the money supply:

● The reserve requirement- CRR and VCRR


● Open market operations
● The discounting rates- Repo rate and Reverse repo rate
● Interest on reserves
Assessmen
t
Tickle your deep thoughts (Essay type questions- 10
mins)
● Why demonetisation had some adverse impact on the economy regardless of the numerous
benefits like tackling corruption and curbing black money in the country?
● How do you think the credit creation by the commercial banks must be checked by the RBI for
the optimum supply of money in the economy?
One-minute writing (5 minutes)
What is high-powered money?

Explain the supply of money in one minute.

What is M2?

List some shortcomings of the barter system.

What are the three main functions of money?


Multiple choice questions (5 minutes)
1. Which of the following is the function of a commercial bank?
(A) Accepting deposits
(B) Credit creation
(C) Agency function
(D) All of these
2. Which of the following is the feature of money?
(A) General acceptability
(B) Homogeneous unit
(C) Liquid asset
(D) All of these
3. To encourage investment in the economy, the Central Bank may:
(A) Reduce Cash Reserve Ratio
(B) Increase Cash Reserve Ratio
(C) Sell Government securities in the open market
(D) Increase Bank Rate
4. Which of the following is called the narrow measure of the money supply?
(A) M2
(B) M3
(C) M0
(D) M4
End

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