{"id":107619,"date":"2021-05-19T16:05:28","date_gmt":"2021-05-19T10:35:28","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=107619"},"modified":"2021-07-01T10:48:32","modified_gmt":"2021-07-01T05:18:32","slug":"money-and-banking-simplified-prelims-capsules-2021","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/money-and-banking-simplified-prelims-capsules-2021\/","title":{"rendered":"Money and Banking\u00a0Simplified | Prelims Capsules 2021"},"content":{"rendered":"<h1 style=\"text-align: center;\"><span style=\"font-size: 14pt; color: #ff0000;\"><strong>Money and Banking Concepts Simplified<\/strong><\/span><\/h1>\n<ul>\n<li><a href=\"#Note1\"><b><span data-contrast=\"auto\">The Barter system<\/span><\/b><\/a><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span>\n<ul>\n<li><a href=\"#Note10\"><span data-contrast=\"auto\">Major problems of the Barter system<\/span><\/a><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li><a href=\"#Note2\"><b><span data-contrast=\"auto\">What is money?<\/span><\/b><\/a><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><a href=\"#Note3\"><b><span data-contrast=\"auto\">Functions of money<\/span><\/b><\/a><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"31\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><a href=\"#Note4\"><b><span data-contrast=\"auto\">Types of money<\/span><\/b><\/a><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span>\n<ul>\n<li><a href=\"#Note11\"><span data-contrast=\"auto\">Full-bodied money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/a><\/li>\n<li><a href=\"#Note12\"><span data-contrast=\"auto\">Token Money<\/span><\/a><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><a href=\"#Note13\"><span data-contrast=\"auto\">Paper money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/a><\/li>\n<li><a href=\"#Note14\"><span data-contrast=\"auto\">Fiat system<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/a><\/li>\n<li><a href=\"#Note15\"><span data-contrast=\"auto\">Legal tender<\/span><\/a><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><a href=\"#Note16\"><span data-contrast=\"auto\">Non-legal tender\/optional money<\/span><\/a><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><a href=\"#Note17\"><span data-contrast=\"auto\">Fiduciary money<\/span><\/a><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><a href=\"#Note18\"><span data-contrast=\"auto\">Near money\/Quasi money<\/span><\/a><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><a href=\"#Note19\"><span data-contrast=\"auto\">Plastic money<\/span><\/a><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><a href=\"#Note20\"><span data-contrast=\"auto\">Deposit money<\/span><\/a><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"31\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><a href=\"#Note5\"><b><span data-contrast=\"auto\">What is Money Supply?<\/span><\/b><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/a>\n<ul>\n<li><a href=\"#Note21\">Monetary Aggregates<\/a><\/li>\n<li><a href=\"#Note22\">Types of deposits held by a bank<\/a><\/li>\n<\/ul>\n<\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"31\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><a href=\"#Note6\"><b><span data-contrast=\"none\">Money Multiplier (m)<\/span><\/b><\/a><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"31\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><a href=\"#Note7\"><b><span data-contrast=\"auto\">Monetary system in India<\/span><\/b><\/a><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"31\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><a href=\"#Note8\"><b><span data-contrast=\"auto\">Credit Creation<\/span><\/b><b><span data-contrast=\"auto\">\u00a0<\/span><\/b><b><span data-contrast=\"auto\">by a commercial bank<\/span><\/b><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/a><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"31\" aria-setsize=\"-1\" data-aria-posinset=\"4\" data-aria-level=\"1\"><a href=\"#Note9\"><b><span data-contrast=\"auto\">What is a\u00a0<\/span><\/b><b><span data-contrast=\"auto\">Digital Currency<\/span><\/b><b><span data-contrast=\"auto\">?<\/span><\/b><\/a><\/li>\n<\/ul>\n<hr \/>\n<p><strong>This Article is part of our <span style=\"color: #ff0000;\">Prelims Capsules 2021<\/span> Initiative, if you want to read more content<\/strong> &#8211; <a href=\"https:\/\/forumias.com\/blog\/prelims-capsules\/\">Click Here<\/a><\/p>\n<hr \/>\n<p><img data-recalc-dims=\"1\" loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-large wp-image-115800\" src=\"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2021\/05\/Monetary-Policy-Explained-1.png?resize=750%2C500&#038;ssl=1\" alt=\"Money and banking concepts - ForumIAS \" width=\"750\" height=\"500\" srcset=\"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2021\/05\/Monetary-Policy-Explained-1.png?resize=1024%2C683&amp;ssl=1 1024w, https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2021\/05\/Monetary-Policy-Explained-1.png?resize=300%2C200&amp;ssl=1 300w, https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2021\/05\/Monetary-Policy-Explained-1.png?resize=768%2C512&amp;ssl=1 768w, https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2021\/05\/Monetary-Policy-Explained-1.png?w=1200&amp;ssl=1 1200w\" sizes=\"auto, (max-width: 750px) 100vw, 750px\" \/><\/p>\n<p><strong style=\"font-family: var(--heading--font-family); font-size: var(--heading--font-size-h3); letter-spacing: var(--heading--letter-spacing-h3); background-color: var(--global--color-background); color: var(--global--color-primary);\">Introduction<\/strong><\/p>\n<p>Money and banking<b><span data-contrast=\"auto\">\u00a0<\/span><\/b><span data-contrast=\"auto\">are the cornerstones of a strong &amp; effective economic &amp; financial system. <\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">But both\u00a0<\/span>money\u00a0and banking<b><span data-contrast=\"auto\">\u00a0<\/span><\/b><span data-contrast=\"auto\">have evolved <\/span><span data-contrast=\"auto\">over centuries to reach where they are today. <\/span><span data-contrast=\"auto\">For a very long time in the past, there was no concept of\u00a0<\/span><span data-contrast=\"auto\">either of the two<\/span><span data-contrast=\"auto\">.\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">People simply exchanged commodities with each other i.e. barter system existed.<\/span><span data-contrast=\"auto\">\u00a0<\/span><span data-contrast=\"auto\">The barter system provided people with a way of acquiring things that they didn\u2019t have.\u00a0\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">And until we began producing a surplus, we didn\u2019t feel the need to change anything. Subsistence <\/span><span data-contrast=\"auto\">was enough. But once production attained reasonable levels and due to other inherent problems of the existing barter system people gradually shifted towards a more nuanced concept &#8211; money and in time banking system was also invented to further other complex functions. <\/span><span data-contrast=\"auto\">\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">In fact, the history of the development of <\/span>money and banking<span data-contrast=\"auto\"> is often interrelated<\/span><span data-contrast=\"auto\">.\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">In India also we find <\/span><span data-contrast=\"auto\">evidence of loans being given during the Vedic period<\/span><span data-contrast=\"auto\">. In the Mauryan period, an instrument called\u00a0<\/span><i><span data-contrast=\"auto\">adesha<\/span><\/i><span data-contrast=\"auto\">\u00a0was in use, which was an order on a banker desiring him to pay the money of the note to a third person, which corresponds to the definition of a bill of exchange as we understand it today<\/span><span data-contrast=\"auto\">.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">So, we can see that while the modern <\/span>money and banking<span data-contrast=\"auto\">\u00a0system might\u00a0<\/span><span data-contrast=\"auto\">seem too big &amp; advanced now<\/span><span data-contrast=\"auto\"> but it all began centuries ago with simple exchange of commodities between people.\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Let us\u00a0<\/span><span data-contrast=\"auto\">understand this topic <\/span><span data-contrast=\"auto\">from UPSC\u2019s perspective.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">It all beg<\/span><span data-contrast=\"auto\">ins<\/span><span data-contrast=\"auto\">\u00a0with the barter system.\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<h3><b><span data-contrast=\"auto\">The Barter system<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h3>\n<p><span data-contrast=\"auto\">As per NCERT,<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<blockquote><p><i><span data-contrast=\"auto\">Exchange of commodities with the mediation of money is called Barter exchange<\/span><\/i><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559685&quot;:720,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p><\/blockquote>\n<p><span data-contrast=\"auto\">In earlier times, when there was no concept of\u00a0<\/span>money\u00a0and banking<span data-contrast=\"auto\">,<\/span><span data-contrast=\"auto\">\u00a0people used barter system of exchange.<\/span><span data-contrast=\"auto\">\u00a0They exchanged commodities.<\/span><span data-contrast=\"auto\">\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Let us illustrate this with a simple example:<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Suppose I want to buy clothes and I have 1 kg apple with me. Now, all I have to do is to find a person who wants apples and has clothes to sell. I\u2019ll approach the person and we both shall finalize a mutually agreeable deal wherein I get what I want (clothes) and the other person gets what he wants (apples). Both parties return home satisfied. This transaction has been successfully done under a barter system<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Bu<\/span><span data-contrast=\"auto\">t there are few obvious problems with this system.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<h4><b><span data-contrast=\"auto\"><a id=\"Note10\"><\/a>Major p<\/span><\/b><b><span data-contrast=\"auto\">roblems of the Barter system<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h4>\n<p><span data-contrast=\"auto\">There are many issues with barter exchange, but here are few major ones:<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"3\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><b><span data-contrast=\"auto\">Double coincidence of wants<\/span><\/b><span data-contrast=\"auto\">: Everyone must find a person who is willing to buy what they are willing to sell and a person who is willing to sell what they want to buy. In the above example, I need to find someone who has surplus clothing to sell and <\/span><span data-contrast=\"auto\">not only this but a person who also wants apples in exchange for clothing.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"3\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><b><span data-contrast=\"auto\">Difficult to carry forward wealth<\/span><\/b><b><span data-contrast=\"auto\">:<\/span><\/b><span data-contrast=\"auto\">\u00a0In the above example, I cannot store apples for an indefinite amount of time. They cannot act as a store of wealth like gold or cash can.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"3\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><b><span data-contrast=\"auto\">Absence of a standard unit of account<\/span><\/b><span data-contrast=\"auto\">: How many apples must I give in return for how much clothing would always be an issue in the above example. There is no standard unit of account. <\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><span data-contrast=\"auto\">As we can see above, to facilitate a transaction, a common medium of exchange acceptable to parties involved was necessary. Hence, the concept of money originated. <\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Now, a person was able to sell apples for money &amp; buy clothes from the money earned. Similarly, the other person was able to sell clothing for money and then buy apples from that money.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"auto\">Note<\/span><\/b><span data-contrast=\"auto\">: Barter system has its advantage<\/span><span data-contrast=\"auto\">s<\/span><span data-contrast=\"auto\"> too, like in cases of a monetary crisis or hyperinflation when the currency has lost its value, barter system works perfectly as an alternative.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p>Money and banking<b><span data-contrast=\"auto\">\u00a0<\/span><\/b><span data-contrast=\"auto\">is<\/span><span data-contrast=\"auto\"> an important topic for UPSC preparation but to understand it fully one must be thorough with underlying concepts, like money, money supply, monetary aggregates, etc.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<h3><b><span data-contrast=\"auto\"><a id=\"Note2\"><\/a>What is money?<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h3>\n<p><span data-contrast=\"auto\">As per NCERT,<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<blockquote><p><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><i><span data-contrast=\"auto\">Money is the most commonly accepted medium of exchange<\/span><\/i><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p><\/blockquote>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"4\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Any object that is generally accepted as means of payment. Currency, in the form of notes or coins, is one type of money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"4\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Do remember that money is not a necessity<\/span><span data-contrast=\"auto\">\u00a0and our society can exist without\u00a0<\/span><span data-contrast=\"auto\">it<\/span><span data-contrast=\"auto\">. It\u00a0<\/span><span data-contrast=\"auto\">acts as a facilitator only.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<h4><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\"><a id=\"Note3\"><\/a>\u00a0<\/span><b><span data-contrast=\"auto\">Functions of money<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h4>\n<ol>\n<li><b><span data-contrast=\"auto\">It acts as a medium of exchange<\/span><\/b><span data-contrast=\"auto\">: Any commodity can be bought through money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><b><span data-contrast=\"auto\">A common measure of value<\/span><\/b><span data-contrast=\"auto\">: All commodities have their value that is expressed in terms of money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><b><span data-contrast=\"auto\">Store of value<\/span><\/b><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><b><span data-contrast=\"auto\">Acts as a standard for deferred payments<\/span><\/b><span data-contrast=\"auto\">: Future monetary obligations can be settled using money<\/span><span data-contrast=\"auto\">. For example A loan which is taken today is settled in installments<\/span><span data-contrast=\"auto\">.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ol>\n<h4><b><span data-contrast=\"auto\"><a id=\"Note4\"><\/a>Types of money<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h4>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"7\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Full-bodied money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"7\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Token money (paper money\/credit money)<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"7\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">Paper money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<ol>\n<li style=\"list-style-type: none;\">\n<ol style=\"list-style-type: lower-alpha;\">\n<li><span data-contrast=\"auto\">Representative full-bodied\u00a0<\/span><span data-contrast=\"auto\">paper\u00a0<\/span><span data-contrast=\"auto\">money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">Inconvertible\u00a0<\/span><span data-contrast=\"auto\">paper\u00a0<\/span><span data-contrast=\"auto\">money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ol>\n<\/li>\n<\/ol>\n<ul>\n<li><span data-contrast=\"auto\">Fiat money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">Legal tender<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">Non-legal tender\/optional money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">Fiduciary money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">Near money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">Plastic money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">Deposit money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<h4><b><span data-contrast=\"auto\"><a id=\"Note11\"><\/a>Full-bodied money<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h4>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"8\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Money whose face value is equivalent to its intrinsic value.\u00a0<\/span><span data-contrast=\"auto\">Full value is embedded in the currency itself<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"8\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Money value = commodity value<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"8\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">For example; gold currency<\/span><\/li>\n<\/ul>\n<h4><b><span data-contrast=\"auto\"><a id=\"Note12\"><\/a>Token Money<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h4>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"8\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Its value as money is much more than its value as a commodity<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"8\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Money value &gt; commodity value<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><span data-contrast=\"auto\">As an example, consider the following two coins:<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"8\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">One coin is of gold and its money value is 1000 Rs (meaning you can buy things worth this much from this coin)<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"8\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">The second coin is of copper and its money value is 10 Rs <\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"8\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">Now, instead of buying something from the gold coin, if you decide to sell it as a commodity in the market, you\u2019ll still get 1000 Rs because\u00a0<\/span><span data-contrast=\"auto\">the coin has that much worth of gold inside it i.e.,<\/span><span data-contrast=\"auto\">\u00a0its intrinsic value is 1000 Rs.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"8\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">This type of currency is called Full-bodied money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li><span data-contrast=\"auto\">On the other hand, if you decide to sell Copper coin in the market as a commodity then you\u2019ll not even get 10<\/span><span data-contrast=\"auto\">\u00a0<\/span><span data-contrast=\"auto\">Rs because the money value assigned to this copper coin is much more than its actual value in terms of\u00a0Copper.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span>\n<ul>\n<li><span data-contrast=\"auto\">This type of currency is called Token money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">Another example of this type of currency is a paper note. A 500 Rs note is worth\u00a0<\/span><span data-contrast=\"auto\">very little<\/span><span data-contrast=\"auto\"> if you decide to sell it as a commodity in the market (As a commodity it is<\/span><span data-contrast=\"auto\">\u00a0just a piece of paper with 500 Rs written on it. That paper will be worth nothing)<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><img data-recalc-dims=\"1\" loading=\"lazy\" decoding=\"async\" class=\" wp-image-107620 aligncenter\" src=\"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2021\/05\/Captureasa.png?resize=729%2C175&#038;ssl=1\" alt=\"\" width=\"729\" height=\"175\" srcset=\"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2021\/05\/Captureasa.png?resize=300%2C72&amp;ssl=1 300w, https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2021\/05\/Captureasa.png?w=598&amp;ssl=1 598w\" sizes=\"auto, (max-width: 729px) 100vw, 729px\" \/><\/p>\n<h4><b><span data-contrast=\"auto\"><a id=\"Note13\"><\/a>Paper money<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h4>\n<p><span data-contrast=\"auto\">Money made out of paper is termed paper money. It is further divided into two parts:<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li><b><span data-contrast=\"auto\">Representative full-bodied\u00a0<\/span><\/b><b><span data-contrast=\"auto\">paper\u00a0<\/span><\/b><b><span data-contrast=\"auto\">money\/convertible money<\/span><\/b><b><span data-contrast=\"auto\">:\u00a0<\/span><\/b><span data-contrast=\"auto\">It is a type of\u00a0<\/span><span data-contrast=\"auto\">paper\u00a0<\/span><span data-contrast=\"auto\">money that is issued against an equivalent amount of gold\/silver (bullion) by the issuing authority<\/span><span data-contrast=\"auto\">.<\/span><b><span data-contrast=\"auto\">\u00a0<\/span><\/b><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span>\n<ul>\n<li><span data-contrast=\"auto\">Anyone who holds this type of paper money can go to the central bank and get that converted to an equivalent amount of gold or silver i.e., paper money of this type can be converted to full-bodied money. Hence it is also termed convertible money<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b><span data-contrast=\"auto\">Inconvertible money:\u00a0<\/span><\/b><span data-contrast=\"auto\">This type of paper money cannot be converted to an equivalent amount of gold or silver. <\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span>\n<ul>\n<li><span data-contrast=\"auto\">No obligation on the central bank to convert it<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">India currently has token money. RBI has no such obligation to convert representative paper money to an equivalent amount of gold\/silver.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><b><span data-contrast=\"auto\">Note:\u00a0<\/span><\/b><span data-contrast=\"auto\">Token money is solely based on trust that people have in the government. <\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li><strong>Consider a time in medieval India.\u00a0<\/strong><\/li>\n<li><span data-contrast=\"auto\">You live in a kingdom that has its own full-bodied coin system. Coins are made up of gold.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">After one year a new ruler comes who states that he is ending all the previous coins and issuing new coins in his name.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">This is similar to\u00a0<\/span><span data-contrast=\"auto\">a sudden pan-economic demonetization where every coin is demonetized. <\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\"><strong>What will happen to your wealth?<\/strong> You might have had 1000\u2019s coins of the previous regime but now they are useless and you don\u2019t have any means to get them exchanged. There are no banks yet \ud83d\ude00<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">Suddenly you have become poor.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">So, foreseeing such circumstances people hoarded coins, melted them, and kept gold or silver instead because the utility of gold or silver was independent of any ruler. <\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">A lack of trust in the ruling dispensation meant people had no trust in the currency. They hoarded it. <\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">Slowly when kingdoms went away and democracy came, people developed trust<\/span><span data-contrast=\"auto\">\u00a0a<\/span><span data-contrast=\"auto\">nd the countries shifted to a token money system.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<h4><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><b><span data-contrast=\"auto\"><a id=\"Note14\"><\/a>Fiat system<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h4>\n<ul>\n<li><span data-contrast=\"auto\">Fiat means orde<\/span><span data-contrast=\"auto\">r<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">It serves as money on the order (fiat) of the government\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">This type of money is issued without any backing of an equivalent amount of gold or silver<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">There is no obligation on any person to accept this money as a medium of exchange. No legal action can be initiated in this case<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<h4><b><span data-contrast=\"auto\"><a id=\"Note15\"><\/a>Legal tender<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h4>\n<p><span data-contrast=\"auto\">It is compulsory to accept this type of money for the settlement of any monetary obligation. <\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li><span data-contrast=\"auto\">Legal tender <\/span><span data-contrast=\"auto\">is the money that is recognized by the law of the land, as valid for payment of debt. Similarly, It must be accepted for discharge of debt. <\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">The RBI Act of 1934, which gives the central bank the sole right to issue banknotes, states that \u201c<\/span><i><span data-contrast=\"auto\">Every banknote shall be legal tender at any place in India in payment for the amount expressed therein<\/span><\/i><span data-contrast=\"auto\">\u201d.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">Hence, the government can issue fiat money and can declare it to be a legal tender<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">The\u00a0<\/span><span data-contrast=\"auto\">coins<\/span><b><span data-contrast=\"auto\"> issued by the Government of India<\/span><\/b><span data-contrast=\"auto\">\u00a0under The Coinage Act, 201<\/span><span data-contrast=\"auto\">1 are legal tender<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span>\n<ul>\n<li data-leveltext=\"o\" data-font=\"Courier New\" data-listid=\"12\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"2\"><span data-contrast=\"auto\">The\u00a0<\/span><b><span data-contrast=\"auto\">One Rupee<\/span><\/b><span data-contrast=\"auto\">\u00a0notes issued<\/span><span data-contrast=\"auto\"> by the Ministry of Finance (Government of India)\u00a0<\/span><span data-contrast=\"auto\">under the\u00a0<\/span><b><span data-contrast=\"auto\">Currency Ordinance, 1940<\/span><\/b><span data-contrast=\"auto\">\u00a0are legal tender<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li><span data-contrast=\"auto\">Every banknote\u00a0<\/span><b><span data-contrast=\"auto\">issued by Reserve Bank of India<\/span><\/b><b><span data-contrast=\"auto\">\u00a0<\/span><\/b><span data-contrast=\"auto\">under\u00a0<\/span><span data-contrast=\"auto\">RBI Act, 1934 (\u20b92, \u20b95, \u20b910, \u20b920, \u20b950, \u20b9100, \u20b9200, \u20b9500 and \u20b92000), unless withdrawn from circulation,\u00a0<\/span><span data-contrast=\"auto\">is a<\/span><span data-contrast=\"auto\">\u00a0legal tender<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span>\n<ul>\n<li><span data-contrast=\"auto\">Did you notice that all coins and 1 Rs note are issued by the government of India while banknotes are issued by RBI!<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">Also, coins are issued under Coinage Act while banknotes are issued under RBI Act 1934<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><b><span data-contrast=\"auto\">Two\u00a0<\/span><\/b><b><span data-contrast=\"auto\">types of legal tender: &#8211;<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559685&quot;:360,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ol style=\"list-style-type: lower-alpha;\">\n<li><span style=\"text-decoration: underline;\">Limited legal tender money<\/span><span data-contrast=\"auto\">: It is compulsory to accept this as a means of payment only up to a certain limit. For\u00a0<\/span><span data-contrast=\"auto\">eg<\/span><span data-contrast=\"auto\">:\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span>\n<ul>\n<li><span data-contrast=\"auto\">50<\/span><span data-contrast=\"auto\">\u00a0<\/span><span data-contrast=\"auto\">p paise coin cannot be used to make a payment beyond 10 Rs<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">Coin\u00a0<\/span><span data-contrast=\"auto\">&gt;= 1Rs can be used to make a payment of only up to 1000 Rs.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li><span style=\"text-decoration: underline;\">Unlimited legal tender money<\/span><span data-contrast=\"auto\">:\u00a0<\/span><span data-contrast=\"auto\">Currency notes are unlimited legal tender and can be offered as payment for dues of any size<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ol>\n<p><span style=\"font-size: 18pt;\"><a id=\"Note16\"><\/a>\u00a0<b>Non-legal tender\/optional money<\/b><\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"15\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Money which has no legal obligation to being accepted by anyone, like Cheque, Demand Drafts, etc. They are generally used and accepted but no one is legally bound to accept them as a mode of payment.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 18pt;\">\u00a0<b><a id=\"Note17\"><\/a>Fiduciary money<\/b><\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"15\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">This type of money is accepted on the basis of the trust between the payee and the payer.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"15\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">For\u00a0<\/span><span data-contrast=\"auto\">eg<\/span><span data-contrast=\"auto\">: Cheque.\u00a0<\/span><span data-contrast=\"auto\">You are not<\/span><span data-contrast=\"auto\">\u00a0bound to accept it legally but\u00a0<\/span><span data-contrast=\"auto\">when there is trust between you and the person who is making the payment via cheque then you\u2019ll readily accept it as a mode of repayment.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<h4><b><span data-contrast=\"auto\"><a id=\"Note18\"><\/a>Near money<\/span><\/b><b><span data-contrast=\"auto\">\/Quasi money<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h4>\n<p><span data-contrast=\"auto\">It refers to\u00a0<\/span><span data-contrast=\"auto\">highly liquid assets that can\u00a0<\/span><span data-contrast=\"auto\">be quickly\u00a0<\/span><span data-contrast=\"auto\">converted into cash<\/span><span data-contrast=\"auto\">. These are generally n<\/span><span data-contrast=\"auto\">on-cash assets that are very liquid but cannot be used directly for transactions.<\/span><span data-contrast=\"auto\">\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"16\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Near money takes some time to convert to money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"16\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><b><span data-contrast=\"auto\">For example,<\/span><\/b><span data-contrast=\"auto\">\u00a0<\/span><span data-contrast=\"auto\">Your\u00a0<\/span><b><span data-contrast=\"auto\">fixed deposit account<\/span><\/b><span data-contrast=\"auto\">\u00a0in any bank is a type of near money. It is liquid but still not liquid as cash because you\u2019ll have to go to the bank<\/span><span data-contrast=\"auto\">\u00a0first<\/span><span data-contrast=\"auto\">, fill in the paperwork to get the\u00a0<\/span><span data-contrast=\"auto\">cash out from your FD before you can spend it. That\u2019s why\u00a0<\/span><span data-contrast=\"auto\">it&#8217;s<\/span><span data-contrast=\"auto\">\u00a0near money.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<h4><b><span data-contrast=\"auto\"><a id=\"Note19\"><\/a>Plastic money<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h4>\n<p><span data-contrast=\"auto\">It is used to refer to credit cards, debit cards, etc that we routinely use instead of actual cash.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<h4><b><span data-contrast=\"auto\"><a id=\"Note20\"><\/a>Deposit money<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h4>\n<p><span data-contrast=\"auto\">Money deposited in banks &amp; financial institutions. For example, your saving accounts, fixed deposits, recurring deposits, etc are all different types of deposit money<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<table style=\"border-collapse: collapse; width: 98.392%; height: 98px;\">\n<tbody>\n<tr>\n<td style=\"width: 100%;\"><b><span data-contrast=\"auto\">Fun fact<\/span><\/b><span data-contrast=\"auto\">:\u00a0<\/span><span data-contrast=\"auto\">The highest denomination\u00a0<\/span><span data-contrast=\"auto\">note<\/span><span data-contrast=\"auto\">\u00a0ever printed by the Reserve Bank of India was the\u00a0<\/span><b><span data-contrast=\"auto\">\u20b910000 note<\/span><\/b><span data-contrast=\"auto\">\u00a0in 1938 which was demonetized in January 1946. The \u20b910000 was again introduced in 1954. These notes were demonetized in 1978<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h3><b><span data-contrast=\"auto\"><a id=\"Note5\"><\/a>What is\u00a0<\/span><\/b><b><span data-contrast=\"auto\">Money Supply<\/span><\/b><b><span data-contrast=\"auto\">?<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h3>\n<p><span data-contrast=\"auto\">It is the total stock of all types of money<\/span><span data-contrast=\"auto\"> held by the public at any point in time.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"18\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">\u2018Public\u2019 here signifies all economic entities except the government &amp; banking system because these entities create money.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"18\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Hence, money supply (MS)<\/span><span data-contrast=\"auto\">\u00a0is,<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<table style=\"color: var(--global--color-primary); font-family: var(--global--font-secondary); font-size: var(--global--font-size-base); border-collapse: collapse; width: 44.1715%; height: 50px;\">\n<tbody>\n<tr>\n<td style=\"width: 100%; text-align: center;\"><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559685&quot;:720,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><span data-contrast=\"auto\">MS = Currency + Bank Deposits<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335551550&quot;:2,&quot;335551620&quot;:2,&quot;335559685&quot;:720,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<ul>\n<li><span data-contrast=\"auto\">MS shows the total purchasing power of an economy <\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><span data-contrast=\"auto\">There are various ways in which Money Supply is measured. These are called Monetary Aggregates.<\/span><span data-contrast=\"auto\">\u00a0<\/span><span data-contrast=\"auto\">It is only once the money supply in the entire\u00a0<\/span>money and banking\u00a0<span data-contrast=\"auto\">s<\/span><span data-contrast=\"auto\">ystem is known that the central bank can take steps to regulate it.\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Before explaining monetary aggregates, we should be fully aware of the banking concepts involved<\/span><span data-contrast=\"auto\">.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<h4><b><span data-contrast=\"auto\"><a id=\"Note22\"><\/a>Types of deposits held by a bank<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h4>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"18\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Demand Deposits (DD)<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"18\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Time Deposits (TD)<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"18\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">Other Deposits (OD)<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><b><span data-contrast=\"auto\">Demand Deposits<\/span><\/b><span data-contrast=\"auto\">: This money can be withdrawn at any time (on-demand) from the bank. These deposits include:<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"26\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Current account<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"26\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">The demand liability portion of a saving account<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><span data-contrast=\"auto\">These deposits are 100% liquid<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"auto\">Time Deposits<\/span><\/b><span data-contrast=\"auto\">: Money can be withdrawn only after maturity or with a penalty before maturity. These include:<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"27\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Fixed Deposits<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"27\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Recurring Deposits<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"27\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">Time liability of saving account<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><b><span data-contrast=\"auto\">Other Deposits<\/span><\/b><span data-contrast=\"auto\">: Demand Deposits with RBI\u00a0<\/span><span data-contrast=\"auto\">which includes demand deposits of public financial institutions, demand deposits of foreign central banks and international financial institutions like IMF, World Bank, etc.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Hence,\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p style=\"text-align: center;\"><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><strong>Net Bank Deposits = DD + TD\u00a0<\/strong><\/p>\n<p><b><span data-contrast=\"auto\">Note<\/span><\/b><span data-contrast=\"auto\">: Total bank\u00a0<\/span><span data-contrast=\"auto\">deposits are different from Net bank deposits. Why? Because banks have other deposits too like the borrowings from RBI<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Now,\u00a0lets\u00a0take a look at the monetary aggregates:\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<h4><b><span data-contrast=\"auto\"><a id=\"Note21\"><\/a>Monetary Aggregates<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h4>\n<ol>\n<li><span data-contrast=\"auto\">M1<\/span><span data-contrast=\"auto\">\u00a0(Narrow Money)<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">M2<\/span><span data-contrast=\"auto\">\u00a0(Narrow Money)<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">M3<\/span><span data-contrast=\"auto\">\u00a0<\/span><span data-contrast=\"auto\">(<\/span><span data-contrast=\"auto\">Broad Money)<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">M4<\/span><span data-contrast=\"auto\">\u00a0(Broad Money)<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">M0<\/span><span data-contrast=\"auto\">\u00a0<\/span><span data-contrast=\"auto\">(<\/span><span data-contrast=\"auto\">Reserve\/High-powered money<\/span><span data-contrast=\"auto\">)<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ol>\n<p><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><b><span data-contrast=\"none\">M1 (<\/span><\/b><b><span data-contrast=\"none\">Narrow Money<\/span><\/b><b><span data-contrast=\"none\">)<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"18\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><b><span data-contrast=\"auto\">M1 = C + DD + OD<\/span><\/b><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li data-leveltext=\"o\" data-font=\"Courier New\" data-listid=\"18\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"2\"><span data-contrast=\"auto\">C \u2013 Currency held by public<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"o\" data-font=\"Courier New\" data-listid=\"18\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"2\"><span data-contrast=\"auto\">DD \u2013 Net Demand Deposits with banks (Doesn\u2019t include interbank deposits<\/span><span data-contrast=\"auto\">\u00a0i.e., deposits\u00a0<\/span><span data-contrast=\"auto\">which a commercial bank holds in other commercial<\/span><span data-contrast=\"auto\">\u00a0<\/span><span data-contrast=\"auto\">banks<\/span><span data-contrast=\"auto\">)<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"o\" data-font=\"Courier New\" data-listid=\"18\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"2\"><span data-contrast=\"auto\">OD \u2013 These include Deposits with RBI held by certain individuals (former RBI governors can open an account with RBI) &amp; institutions (IMF etc)<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><b><span data-contrast=\"auto\">Note<\/span><\/b><span data-contrast=\"auto\">:\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"18\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">For all practical purposes, OD is near about negligible<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"18\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Since the money included in M1 is most liquid so it is termed as narrow money<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><b><span data-contrast=\"none\">M<\/span><\/b><b><span data-contrast=\"none\">2<\/span><\/b><b><span data-contrast=\"none\">\u00a0<\/span><\/b><b><span data-contrast=\"none\">(Narrow Money)<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li><b><span data-contrast=\"auto\">M2 = M1 + Saving account deposits with Post office banks\u00a0<\/span><\/b><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">M2 is almost equal to M1 as deposits with Post office banks is not much\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><b><span data-contrast=\"none\">M<\/span><\/b><b><span data-contrast=\"none\">3 (Broad Money)<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"21\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><b><span data-contrast=\"auto\">M3 = M1 + TD\u00a0<\/span><\/b><b><span data-contrast=\"auto\">(time deposits with commercial banks like Fixed deposits, Recurring deposits)<\/span><\/b><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"21\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">M3 denotes currency and total bank deposits. Therefore, it signifies purchasing power of an economy. In the case of M2 and M4 deposits with Post Office banks are also included. These banks <\/span><span data-contrast=\"auto\">cannot<\/span><span data-contrast=\"auto\">\u00a0give out loans and\u00a0<\/span><span data-contrast=\"auto\">purchasing power is equal to the currency held by the public plus loans given out by the banks. So, instead o<\/span><span data-contrast=\"auto\">f<\/span><span data-contrast=\"auto\"> M2 or M4, we use M3 to\u00a0<\/span><span data-contrast=\"auto\">s<\/span><span data-contrast=\"auto\">how the purchasing power<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"21\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">M3 is the\u00a0<\/span><b><span data-contrast=\"auto\">most commonly used measure of the money supply<\/span><\/b><span data-contrast=\"auto\">.\u00a0<\/span><span data-contrast=\"auto\">It is also known as\u00a0<\/span><b><span data-contrast=\"auto\">aggregate monetary resources<\/span><\/b><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559685&quot;:360,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><b><span data-contrast=\"none\">M<\/span><\/b><b><span data-contrast=\"none\">4<\/span><\/b><b><span data-contrast=\"none\">\u00a0(Broad Money)<\/span><\/b><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"21\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><b><span data-contrast=\"none\">M4 = M3 + Total Deposits with Post Office banks (excludes deposits under National Savings Certificate, Kisan Vikas Patra)<\/span><\/b><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><b><span data-contrast=\"none\">Note<\/span><\/b><span data-contrast=\"none\">: For practical purposes, total deposits with Post office banks\u00a0<\/span><span data-contrast=\"none\">is<\/span><span data-contrast=\"none\"> very less so M4 is taken almost equal to M3<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"none\">Rank monetary aggregates in terms of increasing liquidity<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"21\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"none\">M1<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"21\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"none\">M2<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"21\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"none\">M3<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"21\" aria-setsize=\"-1\" data-aria-posinset=\"4\" data-aria-level=\"1\"><span data-contrast=\"none\">M4<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><img data-recalc-dims=\"1\" loading=\"lazy\" decoding=\"async\" class=\" wp-image-107622 aligncenter\" src=\"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2021\/05\/Capture-sjhdi.png?resize=448%2C258&#038;ssl=1\" alt=\"\" width=\"448\" height=\"258\" \/><\/p>\n<p><b><span data-contrast=\"none\">M0 (High-powered money\/ Primary money)<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li><span data-contrast=\"none\">M0 or H<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"none\">It is the total stock of all types of currency (notes, coins) held by money held by all types of economic entities (public &amp; banks) at any point of time except the government<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"none\">M0 = C + R + OD<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span>\n<ul>\n<li data-leveltext=\"o\" data-font=\"Courier New\" data-listid=\"22\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"2\"><span data-contrast=\"none\">C \u2013 Currency in circulation<\/span><span data-contrast=\"none\">:\u00a0<\/span><span data-contrast=\"none\">It is the total value of the currency (coins and paper currency) that has ever been issued by the Reserve Bank of India minus the amount that has been withdrawn by it.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"o\" data-font=\"Courier New\" data-listid=\"22\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"2\"><span data-contrast=\"none\">R \u2013 Cash Reserves of banks<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"o\" data-font=\"Courier New\" data-listid=\"22\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"2\"><span data-contrast=\"none\">OD \u2013 Other Deposits<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><b style=\"background-color: var(--global--color-background); color: var(--global--color-primary); font-family: var(--global--font-secondary); font-size: var(--global--font-size-base);\"><span data-contrast=\"none\">Note<\/span><\/b><span style=\"background-color: var(--global--color-background); color: var(--global--color-primary); font-family: var(--global--font-secondary); font-size: var(--global--font-size-base);\" data-contrast=\"none\">:<\/span><span style=\"background-color: var(--global--color-background); color: var(--global--color-primary); font-family: var(--global--font-secondary); font-size: var(--global--font-size-base);\" data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"22\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"none\">Vault cash is also not a part of the money supply<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"22\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"none\">Also, M3 &gt; M0 (because M3 includes deposits held by banks while M0 includes cash reserve of the banks and deposits held by a bank is always greater than its cash reserve)<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><b><span data-contrast=\"none\"><a id=\"Note6\"><\/a>Money Multiplier (m)<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"23\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"none\">It is the ratio of money supply (MS) to the reserve money (M0)<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"23\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><b><span data-contrast=\"none\">m = MS\/M0<\/span><\/b><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<h3><b><span data-contrast=\"auto\"><a id=\"Note7\"><\/a>Monetary system in India<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h3>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"24\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">India follows the \u2018<\/span><b><span data-contrast=\"none\">Minimum Reserve System (MRS)<\/span><\/b><span data-contrast=\"auto\">. This system was adopted in place of proportional Reserve System<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"24\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Under MRS, RBI has to maintain reserves of at least\u00a0<\/span><b><span data-contrast=\"auto\">200 Crore<\/span><\/b><span data-contrast=\"auto\">\u00a0in the form of gold &amp; foreign securities.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"24\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">Out of these, at least <\/span><b><span data-contrast=\"auto\">115 Crore\u00a0<\/span><\/b><span data-contrast=\"auto\">should be maintained in terms of gold<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"24\" aria-setsize=\"-1\" data-aria-posinset=\"4\" data-aria-level=\"1\"><span data-contrast=\"auto\">On the maintenance of these reserves, RBI can print unlimited currency against the backing of gold, foreign securities and securities of GOI<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><b><span data-contrast=\"auto\">Things against which RBI can print money<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"25\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Gold<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"25\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Foreign securities<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"25\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">Securities of\u00a0<\/span><span data-contrast=\"auto\">GoI<\/span><span data-contrast=\"auto\">\u00a0(G-sec)<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<h4><b><span data-contrast=\"auto\"><a id=\"Note8\"><\/a>Credit Creation<\/span><\/b><b><span data-contrast=\"auto\">\u00a0<\/span><\/b><b><span data-contrast=\"auto\">by\u00a0<\/span><\/b><b><span data-contrast=\"auto\">a commercial\u00a0<\/span><\/b><b><span data-contrast=\"auto\">bank<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h4>\n<p><span data-contrast=\"auto\">So\u00a0<\/span><span data-contrast=\"auto\">far,<\/span><span data-contrast=\"auto\">\u00a0we have understood few basic concepts of\u00a0<\/span>money and banking<b><span data-contrast=\"auto\">.<\/span><\/b><span data-contrast=\"auto\">\u00a0Now, l<\/span><span data-contrast=\"auto\">et us understand in the simplest of terms the entire process of credit creation.<\/span><span data-contrast=\"auto\">\u00a0First of all, let us see what is an asset and what is a liability for a bank.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li><b><span data-contrast=\"auto\">Assets<\/span><\/b><span data-contrast=\"auto\">: Loans and advances given to anyone are assets for a bank because they generate interest<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span>\n<ul>\n<li><span data-contrast=\"auto\">The asset is something that generates a cash flow in the future<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"29\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><b><span data-contrast=\"auto\">Liabilities<\/span><\/b><span data-contrast=\"auto\">: Deposits made in the bank are liabilities for the bank because they have to be paid back to the customer\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><b><span data-contrast=\"auto\">Note<\/span><\/b><span data-contrast=\"auto\">: Banks are allowed to engage in fractional reserve banking meaning a fraction of the deposits made in the bank have to be kept as a reserve and the rest can be given out as a loan. This is done to prevent problems to the general public.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"30\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">This reserve requirement is done under Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"30\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">SRR &amp; CRR together is known as\u00a0<\/span><b><span data-contrast=\"auto\">Legal Reserve Ratio<\/span><\/b><span data-contrast=\"auto\">\u00a0(LRR)<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<h4><b><span data-contrast=\"auto\">Process of credit creation<\/span><\/b><span data-contrast=\"auto\">:<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h4>\n<p><span data-contrast=\"auto\">With your\u00a0<\/span>money and banking<b><span data-contrast=\"auto\">\u00a0<\/span><\/b><span data-contrast=\"auto\">fundamentals clear, let&#8217;s see how credit creation is actually done by commercial banks.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Here we shall assume that the <\/span><span data-contrast=\"auto\">LRR<\/span><span data-contrast=\"auto\">\u00a0requirement<\/span><span data-contrast=\"auto\">\u00a0is<\/span><span data-contrast=\"auto\">\u00a010%<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li><span data-contrast=\"auto\">Consider a person A who has\u00a0<\/span><b><span data-contrast=\"auto\">100 Rs<\/span><\/b><span data-contrast=\"auto\">\u00a0with him. He has not deposited it in the bank yet.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">Thinking that he is not going to spend that money and that his neighbor might try to steal it from him, he decides to deposit that money in a bank.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">He goes to an SBI branch and deposits Rs 100 in a savings account. Satisfied that his money is safe he comes back home happily.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><b><span data-contrast=\"auto\">Step 1<\/span><\/b><span data-contrast=\"auto\">:\u00a0<\/span><span data-contrast=\"auto\">At this point, SBI has a Demand Deposit of 100 Rs with it. It is a liability at this moment.<\/span><span data-contrast=\"auto\">\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span>\n<ul>\n<li><span data-contrast=\"auto\">It also keeps a reserve of\u00a0<\/span><span data-contrast=\"auto\">10 Rs<\/span><span data-contrast=\"auto\">\u00a0as per the\u00a0<\/span><span data-contrast=\"auto\">LRR requirement<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">So, the loanable amount at this point is <\/span><b><span data-contrast=\"auto\">90 Rs<\/span><\/b><span data-contrast=\"auto\">, not 100 Rs.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li><span data-contrast=\"auto\">One day, Mr. B enters the bank and asks for a loan.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">SBI is more than happy to lend money<\/span><span data-contrast=\"auto\">\u00a0to him.\u00a0<\/span><span data-contrast=\"auto\">It gives him a loan of 90 Rs but this loan is not given in cash, for the obvious reasons.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">Mr. B has an account in ICICI. SBI transfer this amount to his ICICI account.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><b><span data-contrast=\"auto\">Step 2<\/span><\/b><span data-contrast=\"auto\">: Now, ICICI receives 90 Rs as a deposit.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span>\n<ul>\n<li><span data-contrast=\"auto\">It keeps 10% i.e., 9 Rs as a reserve and it can now loan\u00a0<\/span><b><span data-contrast=\"auto\">81 Rs<\/span><\/b><span data-contrast=\"auto\">\u00a0further to another customer.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b><span data-contrast=\"auto\">Step 3<\/span><\/b><span data-contrast=\"auto\">: Similarly, ICICI shall loan this amount to Mr C. He deposits 81 Rs in Axis bank.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span>\n<ul>\n<li><span data-contrast=\"auto\">Now,\u00a0Axis\u00a0bank keeps 10% (8.1 Rs) and can now loan\u00a0<\/span><b><span data-contrast=\"auto\">72.9 Rs<\/span><\/b><span data-contrast=\"auto\"> as a loan<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p style=\"padding-left: 40px;\"><span data-contrast=\"auto\">Did you notice how an initial deposit with SBI went on to create credit in the economy!\u00a0 That\u2019s how credit is created and money gets multiplied in the process. This process of credit creation will go on until the initial deposit of 100 Rs is exhausted.\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><span data-contrast=\"auto\">There is a formula to calculate this.\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><i><span data-contrast=\"auto\">Money Multiplier = 1 \/LRR<\/span><\/i><i><span data-contrast=\"auto\">\u00a0<\/span><\/i><span data-contrast=\"auto\">(For this example: Money Multiplier = 1\/0.1 = 10)<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><i><span data-contrast=\"auto\">Credit Creation = Initial deposit*<\/span><\/i><i><span data-contrast=\"auto\">money multiplier = 100 * 10 = Rs 1000<\/span><\/i><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">So, in the above example, the initial deposit was 100 Rs which means credit creation will be equal to 100*1\/10% = Rs 1000<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Hence, in this case, 100 Rs will generate a credit flow of 1000 Rs in the economy.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"auto\">PS<\/span><\/b><span data-contrast=\"auto\">: No need to remember the formula for credit creation. Given just for your better understanding.<\/span><\/p>\n<p><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\"><span style=\"text-decoration: underline;\"><strong>Note<\/strong><\/span>: Please remember that here we have assumed that all people will not turn up on the same day to ask for their deposit money. This is termed as a bank run and it happens rarely but if it happens then obviously a bank will not be able to extended loans to anyone.<\/span><\/p>\n<p><span data-contrast=\"auto\">We hope you are now clear with the basics of\u00a0<\/span>money and banking<span data-contrast=\"auto\"> and have a better idea of how the entire system works to benefit society by encouraging transactions and increased credit flow in an economy.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">This is an age of rapid technological innovation and adaptation. As a result, the w<\/span><span data-contrast=\"auto\">orld economic and financial system has grown\u00a0<\/span><span data-contrast=\"auto\">tremendously and\u00a0<\/span><span data-contrast=\"auto\">so has the concept of money<\/span><span data-contrast=\"auto\">\u00a0along with it<\/span><span data-contrast=\"auto\">.\u00a0\u00a0<\/span><span data-contrast=\"auto\">Everything is being digitized. It has led us to a point where we now have a digital form of money i.e., a digital currency.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Let us know more about it.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<h3><b><span data-contrast=\"auto\"><a id=\"Note9\"><\/a>What is a Digital\u00a0<\/span><\/b><b><span data-contrast=\"auto\">Currency<\/span><\/b><b><span data-contrast=\"auto\">?<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/h3>\n<p><span data-contrast=\"auto\">Digital currency is<\/span><span data-contrast=\"auto\">\u00a0any currency that\u2019s available exclusively in electronic form.<\/span><span data-contrast=\"auto\">\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"32\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Cryptocurrency is a type of digital currency<\/span><span data-contrast=\"auto\">.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"32\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">The majority of currencies in this world are digital. A<\/span><span data-contrast=\"auto\">s per an estimate, a<\/span><span data-contrast=\"auto\">round 92% of the world&#8217;s currency is already in digital form. Only <\/span><span data-contrast=\"auto\">8<\/span><span data-contrast=\"auto\">% is in cash<\/span><span data-contrast=\"auto\">.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><b><span data-contrast=\"auto\">What is a Central Bank Digital Currency (CBDC)?<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Following the success of decentralized digital currencies like Bitcoin, Ethereum, etc countries the world over are thinking to introduce their own digital currencies<\/span><span data-contrast=\"auto\">\u00a0known as<\/span><span data-contrast=\"auto\">\u00a0Central Bank Digital Currency (CBDC), or national digital currency, in India.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"33\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">CBDC is simply the digital form of a country\u2019s fiat currency. Instead of printing paper currency or minting coins, the central bank issues electronic tokens.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"33\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">This token value is\u00a0<\/span><b><span data-contrast=\"auto\">backed by the full faith and credit\u00a0<\/span><\/b><span data-contrast=\"auto\">of the government.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><b><span data-contrast=\"auto\">Note<\/span><\/b><span data-contrast=\"auto\">: Please keep in mind that Cryptocurrency (like Bitcoin, Dogecoin etc) is a type of digital currency. They are not same. There are major differences between them.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"auto\">Cryptocurrency vs Digital currency<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Here are some key differences &#8211;<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li><b><span data-contrast=\"auto\">Decentralization<\/span><\/b><span data-contrast=\"auto\">:\u00a0<\/span><span data-contrast=\"auto\">Digital Currencies are centralized meaning they are regulated and issued by a single entity like a central bank.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><b><span data-contrast=\"auto\">Opennes<\/span><\/b><span data-contrast=\"auto\">s: In Cryptocurrencies, one can see all the transactions as the directory (ledger) is kept open. <\/span><span data-contrast=\"auto\">This functionality is an integral feature of blockchain where every block contains information about the previous transaction.\u00a0<\/span><span data-contrast=\"auto\">In Digital Currencies one would not be able to visualize the entire chain of transactions.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><b><span data-contrast=\"auto\">Legal framework<\/span><\/b><span data-contrast=\"auto\">:\u00a0<\/span><span data-contrast=\"auto\">Most Cryptocurrencies have no legal frameworks while a digital currency is backed by an appropriate legal framework<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\"><br \/>\n<\/span><b style=\"background-color: var(--global--color-background); color: var(--global--color-primary); font-family: var(--global--font-secondary); font-size: var(--global--font-size-base);\"><\/b><\/li>\n<\/ul>\n<p><b style=\"background-color: var(--global--color-background); color: var(--global--color-primary); font-family: var(--global--font-secondary); font-size: var(--global--font-size-base);\"><span data-contrast=\"auto\">National Digital Currencies around the world<\/span><\/b><span style=\"background-color: var(--global--color-background); color: var(--global--color-primary); font-family: var(--global--font-secondary); font-size: var(--global--font-size-base);\" data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li><span data-contrast=\"auto\">According to the Bank for International Settlements, more than 60 countries are currently experimenting with the CBDC. There are few countries that already rolled out their national digital currency. Such as,<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:240}\">\u00a0<\/span><\/li>\n<li><b><span data-contrast=\"auto\">Sweden<\/span><\/b><span data-contrast=\"auto\"> is conducting real-world trials of its digital currency (<\/span><b><span data-contrast=\"auto\">krona<\/span><\/b><span data-contrast=\"auto\">)<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">The\u00a0<\/span><b><span data-contrast=\"auto\">Bahamas<\/span><\/b><span data-contrast=\"auto\">\u00a0already issued their digital currency \u201c<\/span><b><span data-contrast=\"auto\">Sand Dollar<\/span><\/b><span data-contrast=\"auto\">\u201d to all citizens<\/span><span data-contrast=\"auto\">.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/li>\n<li><b><span data-contrast=\"auto\">China<\/span><\/b><span data-contrast=\"auto\">\u00a0started a trial run of their digital currency\u00a0<\/span><b><span data-contrast=\"auto\">e- RMB<\/span><\/b><span data-contrast=\"auto\">\u00a0amid pandemic. They plan to implement pan-<\/span><span data-contrast=\"auto\">china<\/span><span data-contrast=\"auto\">\u00a0in 2022. This is the first national digital currency operated by a major economy.<\/span><span data-contrast=\"auto\">\u00a0The e-RMB has\u00a0<\/span><b><span data-contrast=\"auto\">no anonymity\u00a0<\/span><\/b><span data-contrast=\"auto\">and requires users to download and register to an app on their smartphone. This centralisation means that the Chinese government would be able to shut down and seize accounts, something that is nearly impossible with the more democratic cryptocurrencies.<\/span><\/li>\n<\/ul>\n<p><b style=\"background-color: var(--global--color-background); color: var(--global--color-primary); font-family: var(--global--font-secondary); font-size: var(--global--font-size-base);\"><span data-contrast=\"auto\">National Digital Currency in India<\/span><\/b><span style=\"background-color: var(--global--color-background); color: var(--global--color-primary); font-family: var(--global--font-secondary); font-size: var(--global--font-size-base);\" data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">With the growth of digital currencies worldwide, various start-ups dealing with cryptocurrency have come up in India, such as\u00a0Unocoin\u00a0in 2013 and\u00a0Zebpay\u00a0in 2014. Further, their volatility is a cause of concern for India.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">So,<\/span><span data-contrast=\"auto\">\u00a0the government-appointed SC Garg Committee for suggestions. The committee recommended banning cryptocurrencies and allow an official digital currency. Further, the committee also drafted a bill Banning of Cryptocurrency &amp; Regulation of Official Digital Currency Bill.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"auto\">PS<\/span><\/b><span data-contrast=\"auto\">:\u00a0<\/span><span data-contrast=\"auto\">Read more\u00a0<\/span><span data-contrast=\"auto\">about the National Digital Currency issue <\/span><span data-contrast=\"auto\">in this\u00a0<\/span><a href=\"https:\/\/forumias.com\/blog\/introducing-national-digital-currency-in-india-explained-pointwise\/\"><span data-contrast=\"none\">article<\/span><\/a><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Money and Banking Concepts Simplified The Barter system\u00a0 Major problems of the Barter system\u00a0 What is money?\u00a0 Functions of money\u00a0 Types of money\u00a0 Full-bodied money\u00a0 Token Money\u00a0 Paper money\u00a0 Fiat system\u00a0 Legal tender\u00a0 Non-legal tender\/optional money\u00a0 Fiduciary money\u00a0 Near money\/Quasi money\u00a0 Plastic money\u00a0 Deposit money\u00a0 What is Money Supply?\u00a0 Monetary Aggregates Types of deposits held&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/money-and-banking-simplified-prelims-capsules-2021\/\">Continue reading <span class=\"screen-reader-text\">Money and Banking\u00a0Simplified | Prelims Capsules 2021<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":115800,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[8031,9],"tags":[],"class_list":["post-107619","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-prelims-capsules-2021","category-public","entry"],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2021\/05\/Monetary-Policy-Explained-1.png?fit=1200%2C800&ssl=1","views":{"total":87,"cached_at":1698384015,"cached_date":1698661028},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/107619","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=107619"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/107619\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media\/115800"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=107619"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=107619"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=107619"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}