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Barter System is the economy where goods are exchanged for goods.
Both parties must want what the other has
Some goods cannot be divided easily
No standard unit to measure value
Perishable goods lose value over time
Large goods are hard to transport
No mechanism for deferred payments
Restricted to local transactions
Money is a commonly used medium of exchange and means of transferring purchase power.
Facilitates purchase of goods and services
Enables capital investment and production processes
Solves double coincidence of wants problem
Helps in distribution of national income
Essential for government revenue and expenditure
Facilitates savings and investment
Provides common unit for economic measurement
Enables price determination in markets
Goods used as money (e.g., grains, cattle)
Coins with intrinsic metal value
ii. Token moneyCoins with face value greater than metal value
Backed by gold/silver reserves
Can be converted to precious metals
Not convertible to precious metals
Legal tender by government order
Cheques, drafts, credit cards
Widely accepted in transactions
Easy to carry and transport
Can be stored without deterioration
Can be divided into smaller units
Long-lasting and wear-resistant
Low cost of production
Money Supply is defined as the amount of money in an economy at a given period of time. It is the sum of currency held by public and demand deposit of public in the bank. It is a stock as well as flow variable.
Sum of currency held by the public and demand deposits held at commercial banks including other deposits held at central bank.
Sum of narrow money and time deposit. The time deposits consist of saving deposits, fixed deposits, call deposits and margin deposits.
Fisher's Quantity Theory of Money shows the positive relationship between the quantity of money in circulation and the price level. According to Fisher, if the quantity of money doubles, the price level will also be doubled and vice versa, other things remaining the same.
| M | = | Money Supply |
| V | = | Velocity of Money |
| P | = | Price Level |
| T | = | Volume of Transactions |
Assumes constant velocity and output
Does not account for dynamic economic changes
Overlooks factors like expectations, supply shocks
Also serves as store of value and unit of account
Variables in equation are interdependent
Inflation is defined as the persistent rise in the general price level. The purchasing power of money or the value of money falls during inflation.
Slow and gradual price rise (1-3% annually)
Moderate price rise (3-10% annually)
Rapid price rise (10-20% annually)
Extremely rapid price rise (50%+ monthly)
Excess demand over supply
Rising production costs
Distorts production patterns
Can hinder or stimulate growth
May increase employment temporarily
Redistributes income and wealth
Creates social unrest and inequality
Encourages hoarding and speculation
Can lead to political instability
Deflation is the opposite of inflation. It is defined as the situation of fall in the general price level or rise in the value of money.
Reduces production and investment
Benefits creditors, harms debtors
Leads to unemployment and recession
Reduces business confidence and consumer spending