MONEY AND BANKING PART 03
DEMAND FOR MONEY Money is a highly liquid asset, is universally acceptable and can be easily used for transacting money This implies it has a high opportunity cost. Demand for money balance is often called liquidity preference. There are 2 motives for demand- Transaction motive and speculative motive,
TRANSACTION MOTIVE 1. The main motive of holding money is for 2. People earn income at different point of time , but 3. It is positively related to the total value of transaction purpose. the spend through out. transactions and negatively related to total velocity with which the money is circulated.
SPECULATIVE MOTIVE People have a tendency to hold money in the form of property, bonds etc. These are called speculative needs. . The demand of money to meet such needs is called as the speculative demand of money It is inversely related to the rate of interest.
SUPPLY OF MONEY The total stock of money held by the public at a point of time is supply of money o . Money consists of currency notes and coins o In India, currency notes are issued by RBI. e Coins are issued by the government of India. o It also includes the current account deposits, held by the public in commercial banks called demand deposits. o Another form is of time deposits in which money cannot be withdrawn before it's maturity period.
NARROW AND BROAD MONEY There are 4 alternatives to money supply- M1, M2, M3, M4. M1 CU DD M2 M1 + Saving deposits with post office saving bank. M3 M1 + Net time deposits of commerical banks. M4 M3+Total deposit with PO savingbank