Lack of double coincidenceof wants

No common measure of value

Limitations of Bartar System Indivisibility

Cant store value

Cannot make deferred payments

Effective economic activities

Benefits
Promotion of division of labour and specialization
Medium of exchange
Inflation
Limitations
Decreases self sufficiency

Durable

Retrieve later

Store of value Safe store

Functions of Money
Inflation
Limitations
Opportunity cost

Standard

Unit of account Compare uneven assets

Easy accounting

Speedy econ. Development

Standard for deferred payments
Increase living standard

Commodity money

Representative money

Fiat money

Types of Money Electronic money

Near money

Money substitutes

Bank money

Domestic goods and services

As a value Unit of money/Price index × 100

Quantity of goods and services a unit of money can Internal value of Money
buy Price index of base year/
Value of Money As an index × 100
Price index of current year

External value of Money Foreign goods and services

Inflation decreases the purchasing power of money

Coverting assets Medium of exchange No extra cost

Convenience Cost Indeterminancy of value

Desire Hold assets Exchange for goods

Indirect demand

Transaction motive

Reasons Precautionary motive

Speculative motive

Nominal Earning /
Price of a security =
Money Demand Interest rate

Income level

Interest rates

Price levels
Liquidity Factors
New trends in financial systems

Real GDP

Company factors

Currency and liquid instruments Country economy As at a date

Narrow money supply

CCp + DDp
M1

Broad money supply

+ TSDp
Money M2
Money Supply
+TSDnrfc + RDfcbu
Methods
Consolidated broad money supply
50% M2b
M2b
TSDnrfc
50% Domestic liabilities

Financial survey
+TSDlsb + TSDrfi
M4

Central bank assets

Central bank liabilities

Public notes and coins Cp

Base Money Public currency @ com. Banks Ckb

Includes
Com. Bank deposits in CBSL RR

Other gov. Deposits in CBSL Doi

Loans of Com. Banks Akb

Government loans CGcb

Assets
International reserves FAcb

Other assets OAcb

Public currency Cp

Central Bank Com. Bank currency Ckb

Com. Bank deposits in CBSL RR

Liabilities Other deposits Doi

Government deposits DGcb

Other liabilities OLcb

Foreign loans FBcb

Money Supply (M)/

K =
Money Multiplier Base Money (H)

Money Supply = Money Multiplier × Base money

Net foreign assets of the banking system

By CB
Net lending received by Gov. From banking system
Determinants of Money Supply By Commercial banks

Private sector loans by commercial banks

Net other assets of banking system

Advances to commercial banks

Net domestic assets with CB
Net lendings to government
Affecting base money
Net foreign assets with CB

Factors affecting Money Multiplier Other assets

Preference to use notes, coins

Affecting Money multiplier SRR

Excess reserves

Measure how fast is money exchanged

No. Of times money moves from one entity to

another

Circulation velocity of Money Rate at which consumers and businesses collectively

spend money

Nominal GDP /
Circulation of Money
Money Supply