BCom 3rd Year Supply Financial Money & High Powered Money Study Material notes in hindi

BCom 3rd Year Supply Financial Money & High Powered Money Study Material notes in Hindi

BCom 3rd Year Supply Financial Money & High Powered Money Study Material notes in hindi : Definition of supply of Money  Measures & Components of Money Supply in India  Money Stock and Flow of Money Relative Importance of Measures of Money Supply Factors Affecting Money Supply Who Supplies Money Narrow Money ( Most Important Notes For BCom Students )

BCom 3rd Year Supply Financial Money & High Powered Money Study Material notes in hindi
BCom 3rd Year Supply Financial Money & High Powered Money Study Material notes in hindi

BCom 3rd Year Nature Importance Financial Money Study Material notes in hindi

SUPPLY OF MONEY AND HIGH POWERED MONEY

Meaning of Supply of Money : Supply of money means the total amount of money available in the economy on a particular time. But supply of money includes only that stock of money which is with the public of a country. It is to be noted that government of the country and financial institutions are the suppliers of money. So stock of money available with the suppliers is not included in it.

DIFINITION OF SUPPLY OF MONEY

There are three opinions regarding the definition of the supply of money. They are as follows:

(1) Under Traditional or Narrow Approach: This is the most traditional and narrow definition of money. According to this approach, supply of money means cash with the people and that portion of cash deposited with the commercial banks, which is demand deposit. According to this meaning, for the medium of exchange, both the money which is available with the people in terms of currency and money deposited with the bank which can be withdrawn by cheque. Thus

Supply of Money (M) = Currency held by public (Currency + Coins) + Demand Deposits in commercial banks.

This approach of supply of money is supposed to be a narrow approach.

(2) Under Broad Approach : While defining the supply of money under this approach, Prof. Friedman said, “The supply of money in a specific time is that money in dollars which is with the public or in the form of time deposits with commercial banks.” Here any other currency for respective country can be taken in place of dollar. Thus, according to this definition medium of exchange and store of money, both are considered as the importance of money. This is known as ‘M,’ in America and M,’ in Britain and India. Thus M, = Currency + Demand deposits with commercial Banks + Time deposit.

Or

My = M, + Time Deposits

(3) Gurley and Shaw Approach : This is the broadest approach for the measurement of the supply of money. This has been produced by Gurley and Shaw. According to them, in the supply of money the above stated ‘M.’ the deposit of the savings bank and other deposits are considered

While discussing all three approaches of the supply of money, the definition of money should be based on the enforcement of the monetary policy of a particular country. The first definition gives stress on the exchange of money where as the second definition is appropriate for the enforcement of the monetary policy. As regards the third definition, it is impractical as it is extremely widespread.

MEASURES & COMPONENTS OF MONEY SUPPLY IN INDIA

Till April 1977, the traditional approach was adopted in India for the measurement of money, in which only currency with people and demand deposit were included. But after April 1977, Reserve Bank has adopted the new method to measure the supply of money. These four methods are the components of the measurement of supply of money, which have been defined as M,,M,, M, and M

(1) M, Measurement : According to this measurement M, = Currency with public (c) + Demand Deposit (DD) + other deposit with RBI (OD)

Here, C = currency with public (Paper money & coins)

DD = Demand Deposit, deposited with the commercial bank, which can be withdrawn by cheques.

OD = other deposits, which includes:

(i) Time deposits of Public sector Financial institutions such as IDBI with RBI

(ii) Demand Deposits of foreign central banks and foreign government with RBI

(iii) Demand Deposits of International Financial Institutions such as IMF and World Bank. But OD certainly does not include the deposits of RBI and the deposits of the banking system of the country under RBI.

(2) M, Measurement: As compared to M,, this one is broader measurement of the supply of money. In this approach the savings with the post office are also included along with all the components of M., Thus, M, = M, + Savings deposits with post office saving banks.

(3) M, Measurement : As compared of M,, M, is also broader approach of the supply of money. In this approach along with all the components of M1 the term deposit of people with the commercial banks are included.

M3 = M, + Term deposits with commercial banks.

(4) M, Measurement: This is the broadest concept of the supply of money. In this approach along with all the components of M, all the deposits with the post offices (excluding NSC) are included.

M4. = M, + Total deposits with post office (excluding NSC)

= M3, + all deposits with post office-NSC

Thus among the above concepts, M,, and M, are the narrow approach of the supply of money, where as M, and M are broader concept but there is less liquidity of money in this concept also.

M3, has a great importance among the above four measurement. On the bases of this measurement Reserve Bank publishes the data. In these days Reserve Bank gives priority to M, measurement, because it includes currency with the public and deposits with bank, which helps to prepare the credit budget for credit policy. Chakrabarti Committee had also recommended this measurement. Thus, M, is a standard measurement in India like the developed country.

MONEY STOCK AND FLOW OF MONEY

In common language stock of money and flow of money are considered as synonyms of each other, but this concept is not true. Because in economy, at any specific time the amount of money in circulation is a called stock of money. Secondly, the amount of supply money on a particular date is known as stock of money. On the other hand, the supply of money is considered for a particular period of time involved is regarded as flow of money. If stock of money is multiplied by average velocity of money, then we can know the flow of money. For example, if the stock of money is 1000 crore and in a particular time period its velocity is 20, then the supply of money will be 20,000.

In a country the stock of money is controlled by central bank, but velocity is not controlled by central bank. Velocity depends on public. Basically velocity refers to using a single unit of money by the public for exchange over a specific period of time.

RELATIVE IMPORTANCE OF MEASURES OF MONEY SUPPLY

It has been discussed earlier in this chapter that there are four approaches of supply of money in India, which are defined in context of M., M., M, and MA Among these four approaches, Reserve Bank gives more attention to M, and Me and among these two more emphasis is laid on M, As regards M, and M., less attention is paid on them. Because in these two measurements the deposits of post offices are also included. It is assumed that the amount deposited with post office is the nominal portion of total deposits of the economy. A part of this, there is no control of Reserve Bank on the deposits with post offices. In spite of them: Reserve Bank is continuously publishing data of above four measurements since April 1977

According to new measurement of Reserve Bank Reserve Money (MB): currency in circulation + Banker’s deposits with the RBI + Other deposits with the RBI = Net RBI credit to government + RBI credit to commercial Sector + RBI’s Claim on Bank + RBI’s net Foreign assets + Government’s currency liabilities to public – RBI’s net non-monetary liabilities.

FACTORS AFFECTING MONEY SUPPLY

In any economy the supply of money is affected by various factors. Some of them are as follows:

(1) Monetary Policy of the Central Bank : Monetary policy of Central bank plays an important role in the supply of money. When central bank of a country adopts cheap monetary policy then the public can avail loan at a lower rate of interest. As a result supply of money will increase. On the contrary, if the central bank of the country increases rate of interest or CRR [Cash Reserve ratio) or purchases the securities in open market then it means expensive money policy is adopted. In such a way supply of money will decrease.

(2) Commercial Bank’s Capacity and Policy of Credit Creation : Bank creates credit policies on the bases of their deposits. In banking system credit depends on quantity of money available in the fund. If number of credits will increase it will lead to an increase in supply of money. On the contrary, quantity of credit will decrease if deposits decrease. Aprt from this, expansion or contraction of credit also depends on the CRR of Reserve Bank.

(3) Government’s Fiscal Policy: If the government follows the policy of deficit budget, it increases the supply of money. On the other hand if the government follows the policy of surplus budget it decreases the supply of money.

(4) Public Desire : Credit Creation Capacity of commercial banks also depends on whether the public wants to keep maximum money in the form of currency with them or deposit them in banks. If the public desires to keep maximum money in commercial banks the capacity of credit creation of banks will increase along with an increase in the supply of money. On the other hand if the public desires to keep currency with them, maximum money in the form of currency then the credit creation capacity of bank will decrease and this will also lead to decrease in the supply of money.

WHO SUPPLIES MONEY ?

At present government, central bank as well as commercial banks supplies the money. In India the central bank is the Reserve Bank of India. in India one rupee coins are issued by the finance ministry of the Government of India. Reserve Bank of India is the central bank of India. Currencies are issued by Reserve Bank of India on the bases of Minimum Reserve System. Reserve Bank has to keep gold and foreign securities worth 200 crores in Reserve Fund. Out of this gold must be valued of 115. crores. Commercial bank creates credit or supply or supply of money on the bases of demand deposit. Expansion or contraction of supply of money depends upont the monetary policy of the Reserve Bank of India.

NARROW MONEY AND BROAD MONEY CONCEPTS

The difference between narrow money and broad money is based on the fact that in a country which measures among M,,M,, M, and M, is used to find the total supply of money. If M, or M, is used as a form of measure then it is considered as narrow concept of supply of money. Apart from this, if the measurement is M, or M, then it is considered as the broad concept of supply of money,

HIGH POWERED MONEY

High powered money or powerful money refers to that currency that has been issued by the Government and Reserve Bank of India. Some portion of this currency is kept along with the public while rest is kept as funds in Reserve Bank. Thus, we get the equation as

H=C+R

Where H = High Powered Money

C = Currency with the public (Paper money + coins)

R = Government and bank deposits with RBI

Thus the sum total of money deposited with the public and the funds of banks is termed as powerful money. It is mainly created by the central bank. Since funds of commercial banks play an important role in the creation of credit. so it is very important to study about funds. Reserve Fund are of two types: (i) Statutory Reserve Funds of banks which is with the central bank (RR) and (ii) Extra Reserve Fund(ER).

Thus H = C + RR + ER

High powered money is also known as secured money (RM) because banks keep with them Reserve Fund(R) and on the bases of this Demand deposits (DD) are created. Since the bases of creation of credit is Reserve Fund (R) and Ris obtained as a part of high powered money (H) Security fund so high powered money is termed as Base money.

COMPONENTS OF HIGH POWERED MONEY

As it has been mentioned earlier in this chapter, the following are the important components which determine High Power Money :

1 Currency with the public

2. Other Deposits with RBI

3. Cash with Banks

4. Banker’s Deposits with RBI.

High powered Money (H) includes currency with Public (C), important reserves of Commercial banks and other reserve (ER). Thus we get, the equation:

Now of Necessary reserve ratio is RRr and Necessary Reserve of Deposits ratio is RR/D and Extra Reserve rario is ERr hen revised equation Will be

Enclosed figure clears that if supply of high powered money increases AH then Hs curve jumps up to Hs, demand and supply of high powered money is in equilibrium condition on E. supply of money is ON when supply of high powered money goes to Hs, then new point of equilibrium is E, and supply of money in these two OM,. From the enclosed figure it is also clear that when high powered money increases AH then supply of money increases to AM.

SOURCES OF HIGH POWERED MONEY

The following are the sources of High powered Money :

(1) Claims of Reserve Bank of India ; Reserve Bank also provides loans to the government. This loan is in the form of investment in government securities by the Reserve Bank. After deducting the deposits of government from quantity of loan of Reserve Bank quantity of net bank credit to government is calculated. It is also a source of High Powered Money.

(2) Net Foreign Exchange Assets of Reserve Bank : It is the work of Reserve Bank to make arrangement for foreign exchange funds. When Reserve Bank purchases foreign securities by paying the money of the country, then the quantity of foreign exchange increases which increases high powered money. On the contrary, when Reserve Bank sells foreign securities then the quantity of foreign exchange with the central bank of the country decreases. It results decrease in high powered money.

(3) Government’s Currency Liabilities to the Public: Finance Ministry of the Indian Government is responsible for printing one rupee note and also for coinage. This function is done through the government for Completing money Related Responsibilities toward the public Thus With  the increase in these

liabilities, quantity of supply of money will increase and the quantity of High Powered money will also increase.

(4) Net Non-Monetary Liabilities of Reserve Bank: The non-monetary habilities of Reserve Bank is in the form of capital introduced in national fund and statutory fund. Its main items are-Paid-up Capital, Reserve Fund, Provided Fund and pension fund of the employees of Reserve Bank of India.

Non-monetary liabilities of Reserve Bank are inversely proportional to high Powered Money i.e. with the increase in non-monetary liabilities, there will be a decrease in the quantity of new high powered money. Thus,

H=1+2 +3 – 4

From the above discussion we get information about the source of High Powered Money but it is also necessary to know that with the changes in these sources or factors, what changes takes place in the supply of money etc. In fact supply of money is the result of H. Size of H depends upon the ratio between reserve fund and deposits, and the ratio between time deposits and demand deposit.

IMPORTANCE OF HIGH POWERED MONEY

The following are the importance of High Powered Money :

(1) Base Money : Deposit of Public in a bank and expansion of credit are the base of supply of money. That is why some economists considered it as base money.

(2) Source of changes : The direction in which change in the high power money takes place is powered to the direction of change in the supply of money. Thus from this point of view High Powered Money is also important.

(3) Money Multiplier : What will be money multiplier (M) is declared in economy on the bases of High Powered Money because supply of money is far more than high power money.

(4) Monetary Control: A Special attention is paid by the central bank of any country on High Powered Money at the time of monetary control. Because it is a big part of total supply of money in a country.

EXERCISE QUESTIONS

Long Answer Type Questions

1 What do you mean by supply of money ? Discuss its various concepts.

2. What do you understand by supply of money? Explain the measures and components of money supply in India.

3. Explain the factors affecting money supply. II. Short A

Answer Type Questions

1 Distinguish between money stock and flow of money.

2. Who supplies money?

3. What is high powered money?

4. Explain the importance of high powered money.

III. Objective Type Questions

Choose the correct options

1 Currency includes ..

(a) Paper Money

(b) Coins

(c) Paper Money + Coins

(d) Foreign Money

Supply of Money and High Powered Money

2. Measures of supply of money in India is :

(a) M

(b) M,,M,

(c) M, M2M,

(d) M1, M2, M3, M4

3. Components of High Powered Money are:

(a) C + RR + ER

(b) C + RR – ER

(c) C + RR + ER

(d) None of these

4. M, measurement includes:

(a) C + DD

(b) C + OD

(c) C + DD + OD

(d) None of these

5. According to Gurley and Shaw Approach measurement of supply of money is :

(a) Narrow

(b) Very narrow

(c) Broad

(d) Very broad

[Ans.: 1. (a), 2. (d), 3. (a), 4. (c), 5. (d).]

State whether the following statements are True or False :

1 Stock of money and flow of money are the synonyms of each other.

2. At present, Government, Central Bank as well as Commercial Banks supplies the money.

3. High powered money refers to that currency that has been issued by the Government and Reserve Bank of India.

4. Supply of Money = Currency held by Public + Demand deposits in Commercial

5. In present day there is no importance of High powered money.

[Ans. : 1. Flase, 2. True, 3. True, 4. True, 5. False.]

Supply Financial Money & Powered

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