MONEY

Money is a medium of exchange. It is instrumental in the exchange

of goods or services. money is the most liquid assets among all
our assets. It also has general acceptability as a means of payment
along with its liquid nature.

Functions of Money
There are many static and dynamic functions of money as follows:

Static Functions of Money

These functions are:

 A medium of Exchange – In an exchange economy, money

plays an intermediary role. It makes the exchange system
smooth and convenient.
 A measure of Value – The value of a product or service is
determined on the basis of the money needed for its
possession. This helps in making the exchange a mutually
profitable activity.
 The Standard of Deferred Payments – Money plays an
important role in lending and borrowing. Money is taken as a
loan and repaid after a time-gap.
 Store of Value – You can store the purchasing power of
money and keep a part of it for future use – monetary
savings. You can use your current income for current
consumption as well as future consumption through savings.

Dynamic Functions of Money:

These functions are:

  Money can activate idle resources and put them into
productive channels.
 Therefore, it helps in increasing output, employment, and
also income levels.
 Further, it helps in converting savings into investments.
 The creation of new money governments of modern
economies can spend more than what they earn.

Functions of Functions of money can be broadly categorised into the following two types:
money (a) Primary functions
(b) Secondary functions

(a) Primary i) Medium of exchange:

functions ● It means that money can be used to make payments for all the
transactions of goods and services.
● A buyer can buy goods through money, and a seller can sell goods for
money.
● It is an essential function of money.
ii) Measure of value:
● Money serves as a measure of value.
● The value of all goods and services is expressed in terms of money.

(b) Secondary i) Standard of deferred payments:

functions ● It means that money acts as a ‘standard’ for making future payments.
● It has made deferred payments much easier than before.
● Example: When we borrow money from somebody, we have to return
both the principal as well as the interest amount in the future.
● Money is a convenient mode of calculation and payment of interest
amount to be paid in the future.
● This function has facilitated borrowing and lending.
● It has also led to the creation of financial institutions.
ii) Store of value:
● A store of value implies a store of wealth.
● Money can be easily stored for future use.
 ● It is the most convenient and economical means to store earnings and
wealth.
iii) Transfer of value:
● Money also serves for transfer of value.
● It facilitates buying and selling of goods not only in the domestic country
but also in other parts of the world.

HIGH POWERED MONEY

It is the base for the expansion of bank and creation of money
supply. The supply of money varys directly with monetary base
High powered money is the liability of the monetary authority of the country. This is
also called the monetary base and is created by the RBI. High powered money includes
currency (notes and coins), deposits with the government and reserves of commercial
banks with RBI. So, to sum up, high powered money is
H=C+R
Where
H - High powered money
C - Currency
R - Cash Reserves of commercial banks

High Powered Money (HPM) is the net or total liability of the monetary authority of any
nation......in India it is the liability of RBI.

It is simply the sum of all currency in circulation with the people of country , cash kept in
the commercial bank vaults along with the deposits of govt. of the country and
commercial banks.
The term liability basically means that when people/govt/commercial banks produce the
currency/claims....the RBI has to pay value equal to currency/claim

The RBI uses this H.P.M. for regulation of money supply in the economy . By controlling
the money supply RBI regulates (i.e tries to regulate) the inflation in eco.

RBI uses the H.P.M for process of money creation . Money creation will increase the
supply of money in eco

FINANCE
Finance is the process of raising funds or capital for any kind of expenditure . It
is the process of channeling various funds in the form of credit, loans, or
invested capital to those economic entitiews that most need them or can put
them to most productive use.
ROLE OF FINANCE IN AN ECONOMY.
Types of Finance

What is Personal Finance?

Personal Finance is managing the finance or funds of an
individual and helping them achieve the desired goals in terms
of savings and investments. Personal Finance is specific to
individuals and the strategies depend on the individuals earning
potential, requirements, goals, time frame, etc. Personal
finance includes investment in education, assets like real
estate, cars, life insurance policies, medical and other
insurance, saving and expense management.
Personal Finance includes:

 Protection against unforeseen and uncertain personal

events
 Transfer of wealth across generations of the family
 Managing taxes and complying with tax policies (tax
subsidies or penalties)
 Preparing for retirement
 Preparing for long term expenses or purchases involving a
huge amount
 Paying for a loan or debt obligations
 Investment and wealth accumulation goals

What is Corporate Finance?

Corporate Finance is about funding the company expenses and
building the capital structure of the company. It deals with the
source of funds and the channelization of those funds like the
allocation of funds for resources and increasing the value of the
company by improving the financial position. Corporate finance
focuses on maintaining a balance between the risk and
opportunities and increasing the asset value.
Corporate Finance Includes:

 Capital budgeting -Capital budgeting is used by companies to evaluate major projects and investments,
such as new plants or equipment.

 Employing standard business valuation techniques or real

options valuation
 Identifying the source of funding in the form of equity,
shareholders’ funds, creditors, debts
 Determining the utility of unappropriated profits for future
investment, operational utilization, or distribution to the
shareholders
 Acquisition and investment in stock or other assets
 Identifying relevant objectives, opportunities, and
constraints
 Risk management and tax considerations
  Stock issuance while going public and listing on the Stock
exchange

What is Public Finance?

is all govt act. related to money and mgmt
this includes taxation govt spending
budgeting ,any debt issuance policies.ex
national debt, taxation system expenditure
This type of finance is related to states, municipalities,public. It
includes long term investment decisions related to public
entities. Public finance takes factors like distribution of income,
resource allocation, economic stability in consideration. Funds
are obtained majorly from taxes, borrowing from banks or
insurance companies.
Public Finance includes:

 Identifying the expenditure required by the public entity

 The sources of revenue for the public entity
 Determining the budgeting process and source of funds
 Issuing debts for public projects
 Tax management

The other two famous terms in Finance are the Microfinance

and Trade Finance

What Is Microfinance?
Microfinance is also known as microcredit. This type of finance
is specifically designed for individuals who do not have easy
access to financial services. These individuals include
unemployed and lower-income group individuals. Banks may
even offer additional services like saving accounts,
microinsurance, and trainings. The main motive behind
providing microfinance is to provide an opportunity for these
individuals to become self-reliant.
Lenders often grant loans after pooling borrowers to ensure
better repayment probability. The repayment amount on such
microloans is higher than that of conventional financing due to
the risk involved.
Microfinance includes:

 Bank checking and savings account

 Educational programs on the principles of investing
 Training on skills like accounting and bookkeeping
including cash flow management, profit and loss
statements, etc.
 Basic money management training
 Lessons on financial terms and concepts like interest rate,
cash flow, budget, debt, etc.

What is Trade Finance?

Trade Finance includes financial services and instruments that
enable and facilitate trade internationally. Trade finance is ideal
for importers and exporters to carry on smooth international
transactions by reducing risk in global trade. Trade finance can
help reduce the risk associated with global trade by reconciling
the divergent needs of an exporter and importer.
Unlike conventional finance, trade finance is used to protect the
two parties from the various risks involved in international trade
and does not mean that the parties lack funds or liquidity. The
risks involved in international trade are currency fluctuations,
non-payment by the party, political instability, creditworthiness
of the parties, etc.
Trade finance involves a third party for conducting a transaction
thus eliminating the risk of supply and payment. In trade
finance, the exporter is provided with the payment as per the
agreement and the importer can avail of a credit facility to fulfill
the trade order.
Apart from protecting against the risks, non-payment, and non-
receipt of goods, trade finance also improves the efficiency and
revenue. It enables the company to receive a cash payment
based on the accounts receivables as the buyer’s bank
guarantees payment. This also ensures timely payments and
assured shipment of goods. The different parties involved in
trade finance are importer, exporter, banks, insurers, credit
agencies, trade finance companies
FINANCIAL SYSTEM
A financial system is an economic arrangement wherein financial
institutions facilitate the transfer of funds and assets between
borrowers, lenders, and investors. Its goal is to efficiently distribute
economic resources to promote economic growth and generate
a return on investment (ROI) for market participants.

Key takeaways

 A financial system consists of individuals like borrowers and

lenders and institutions like banks, stock exchanges, and
insurance companies actively involved in the funds and assets
transfer.
 It gives investors the ability to grow their wealth and assets,
thus contributing to economic development.
 It serves different purposes in an economy, such as working as
payment systems, providing savings options, bringing liquidity
to financial markets, and protecting investors from unexpected
financial risks.
 A specific set of rules drafted under different government
policies is required for a stable financial system operating at
corporate, national, and international levels

FINANCIAL INTERMEDIARIES
Financial intermediaries serve as middlemen for financial transactions,
generally between banks or funds.These intermediaries help create
efficient markets and lower the cost of doing business.

UNIT 4

FINANCIAL REGULATORS:-
a person or organization that has been given the official job of
making sure that banks, financial businesses, etc. act in
a responsible way and do not break the law. In the
UK, financial regulators work for the Financial Services Authority