1.What is Money? Explain the Functions of Money.
Ans:- In ordinary sense, money means the coins made of metals. But it is not sufficient meaning of money. In development of human civilization the commodity like tea, tobacco, cigarette we use as money beside metal. Any commodity should perform the function of money is called money. The four functions of money are:- Medium of exchange, Measure of value, standard of differed payment and store a value. In this way, any commodity performing this function may be called money. Money has been defined by different economist in different ways.
According to Knapp, ”Anything which is declared money by the state becomes money.”
Broadly speaking, there are four function of money the function of money can be expressed by saying, money is matter of function four, ”A medium, A measure, A standard, A store.”
The function of money can be divided into following part such as:-
A. Primary function
B. Secondary function
C. Contingent function
A. Primary function:-
Ans:- Primary function is also called measure and original function of money. The primary function of money is also explain from below.
a. Medicine of exchange:-
Ans:- Medium of exchange is one of the important function of money. Money work as medium of exchange. The exchange was difficult in barter system due to lack of double coincidence of wants. The involutions of money remove these difficulties. Money is a generalize purchasing power. We get money by doing work and with it buy goods and service available in the market.
b. Measure of value:-
Ans:- Money also serve as common measure of value and unit of account. It barter system, the evaluation of commodity should have to be done with all other commodity. In such situation, it was almost impossible to determine the value of commodity. The monitory unit use in calculation is called unit of account. The price of goods and service are expressed in money.
B. Secondary function:-
Ans:- The secondary function of money can be explained as follows:-
a. Standard of deferred payment:-
Ans:- Money also serves as the standard of deferred payment. The lending and borrowing are expressed in money due to qualities stability in value, general acceptability and durability, money is regarded best for transaction. Money encourages lending and borrowing. If rupees 10,000 is given as credit for 10 years, it is paid back after 10 years. But a cow is given as credit for 10 years only low the quality cow can be back after 10 years.
b. Store of value:-
Ans:- Money also services as a store of value. Money serves as store of value in short run as well as long run. In barter system, commodity couldn’t be stored for a long time. Due to quality of durability and stability in value of money can be stored for a long time.
c. Transfer of value:-
Ans:- Money also serves as transfer of value or purchasing power. People transferred value by selling commodity and by buying commodity and property with other.
D. Contingent function:-
Ans:- The contingent function of money can be explain as follow:-
a. Basic of credit:-
Ans:- In present time, the credit money like cheque, draft, bill of exchange are in wide use. The credit instrument are issued on the basis of cash reserve. The credit instrument like cheque, is issued on the basis of deposited. Hence, money is basis of credit.
b. Distribution of social income:-
Ans:- National income is distribution among the factor in money. The contribution of all factor are calculated in money.
c. Maximum benefit:-
Ans:- People derived maximum satisfaction from own ‘5 income by the help of money. According to law equal marginal utility, consumer will distributed his limited resource than he will get equal marginal utility in all expense by money.
2. Explain the Forms or kind/types of money?
Ans:- There are different forms or kind of money such forms or kind of money can be explain as follows:
a. Commodity money or commodity standard:-
Ans:- Commodity use as money is called commodity money or commodity standard. People have use different type of commodity as money. As for eg:- people use animal leather, bones during hunting age calctle during pastoral and grains during agriculture as money. These commodity is lacked the basis feature good money such as:- uniformity, stability, divisibility, durability and transportability. Hence, they were discarded as money.
b. Metallic money or standard:-
Ans:- In the metal like gold, silver are use as money. It is called metallic money or metallic standard. These money posses the quality of good money so, they were use for a long time. In ancient time, iron and copper also use as money. But scarce these metal, use of gold and silver as money. There are two type of metallic money such as:-
- Standard of full bodies money:-
Ans:- The gold and silver coin with definite weight and purity are called. Standard of full bodies is equal to the intrinsic value. It value doesn’t fall even it sold by melting. These money has unlimited legal tender. Hence, people are bounded by law to accept any quantity of each.
- Token or subsidiary coins:-
Ans:- The money made by inferior metal is called token or subsidiary money. The coin made of aluminum copper is token money. The face value of token money is higher than the intrinsic value. It real value disappeared if it melted. Since, this money is limited legal tender, Nobody can be made to accept more than particular quantity. Hence, they are called subsidiary money.
c. Paper money:-
Ans:- The paper money is issued by the government or central bank is called paper money. Such money posses higher face value than intrinsic value. According to mark polo, ”the paper money was first use in china the paper money unlimited legal tender hence, all are bound by law to accept in any quantity. Since, it is legal tender, it is accepted by all. The paper money can be also divided into two part such as:-
- Representative money:-
Ans:- It is expensive to circulate the good like gold in large quantity. Hence, the goods are kept in reserve fund and the certificate of ownership is circulated. For eg:- USA had circulated certificate on the basis of gold reserve during 1900 to 1933 when cent percent kept in money the paper money or Note is called representative money. Since, they can be converted in to gold in cash if need. They are also called convertible paper.
- Fiat Money:-
Ans:- If the gold isn’t kept in the result in full value. It is called fiat money. According K fiat, money is also representative money its face value is many time higher than the nitric value. Since, it is issued by the state. It is unlimited legal tender but there is no legal provision to convert into gold or silver. Hence, it is also called inconvertible paper money. The process of issuing such money is somewhat like the process of credit creation of commercial bank. Due to this the requirement gold reserve began to decline.
- Bank or deposit money:-
Ans:- The cheque drawn on demand or current deposit of commercial bank is called bank or deposit money. There are controversies among economist as to whether saving deposit can be regard as money or not. But there consenter that saving deposit is a paper money. this money also perform the function of money such as medium of exchange, measure of value, standard of deferred payment and store of value. Saving deposit is also classified as money.
In present time, the other medium of exchange such bank draft, traveler cheque, bill of exchange, credit cards are also counted as bank money but since these money aren’t legal tender, they are called optional money. Since these money are used in transaction, they are also called credit money.
3. Describe the Role or importance of Money?
Ans:- Modern world can’t move without money. The art, science, commerce and industry of modern civilization are depended directly on money. Money is great wheel of circulation. The operation of modern economy is fully based on money. According to Marshall, ”Money is pivot around which the whole economic clusters” the role or importance of money can be explained as follows:-
a. Consumption:-
Ans:- The satisfaction derived from the consumption of goods and service are measured by the help of money. It also measured the utility derived from goods and service. Human wants are unlimited but means are limited. Men can rationally are the limited income to meet one’s want by the help of money. Due to money, men derived maximum satisfaction by making marginal utility of all commodities equal.
b. Production:-
Ans:- The specialization through division labour has been made possible by money. The production process of modern world isn’t possible without money. The division of labour isn’t possible without the medium of exchange. Human wants rapidly increase. Hence, the production increasing rapidly in the modern world.
c. Exchange:-
Ans:- Money facilitate exchange and help in the development of trade and commerce, both national and international. Money posses the purchasing power and service as medium of exchange. It means, money facilitate transactions.
d. Distribution:-
Ans:- Money is also important in the field of distribution. The share of production should be distributed among different factor of production like land, labour and capital. Money has made it possible to distribute national income in different sector.
e. Public finance:-
Ans:- Money is equally important in the field of public finance. The government receives the revenue like tax, price, aid, fees in money similarly, it spend on agriculture, industry, trade, infrastructure in money.
4. Critically examine the Quantity Theory of Money?
Ans:- This theory is one of the important and oldest theory of the value of money. The theory was at first introduce by Davidhume and Cantallain but the credit is given growing fisher for the development of this theory.
This theory is based on general price theory The price of commodity is determined by demand and supply of commodity. Such as the value of money is also determined by demand and supply of money. According to this theory, the value of money is determined by two factor such as:-
A. Total supply of money
B. Total demand for money
A. Total supply of money:-
Ans:- In certain period, total supply of money depend on total quantity of money. In present time, there are different kind of money found in society such as:- coins, paper Note, bank money or bank deposit.
But it is necessary to find out total supply of money in a point of time. In a point time, total supply of money depends on velocity of circulation of money. In certain period, one unit of money is circulated from one hand to another hand is called average velocity of circulation of money.
For total quantity of money we use ”M” and for average velocity of circulation of money we use ”V”
Total supply of money = M x V
B. Total demand for money:-
Ans:- According to fisher version the demand for money is due to transaction motive money has no direct. The important function of money is medium of exchange. According to this theory, the demand for money is mainly depend on total volume of transaction of goods and services. In this way, total demand for money is determined by total volume of transaction.
For total volume of transaction the used (T)
For average price level we use ‘P’
Total demand for money = total volume of transaction (T) x price level (P)
MV = PT
P = MV/T
According to this equation, price level affected by ‘M’ ‘V’ and ‘T’ it means M and V increase and ‘T’ decreases.
This theory is based on some assumption such as:-
a. ‘V’ and ‘T’ are constant factor.
b. ‘M’, ‘V’ and ‘T’ are independent factor.
c. ‘P’ is a passive factor.
This theory can be explain by a diagram:
In this figure OY- axis represent price level and OX- axis supply of money. If supply of money increases OM2 to OM3 price level also increase OP2 to OP3. Similarly decrease OP1 to OP2. There is direct relation between supply of money and price level.
In figure ‘B’ OY- axis represent value of money and OX- axis represent supply of money. SM is supply of money increase OM2 to OM3 value of money decrease to OV2 to OV1. Similarly, supply of money decrease OM2 to OM1, value of money increase OV2 to OV3. There is inverse relation between supply of money and the value of money.
This theory can be criticized on several grounds such as:-
a. ‘V’ and ‘T’ are not constant factor:-
Ans:- This theory assume that ‘V’ and ‘T’ are constant factor but it is not true. In the period of boom ‘V’ and ‘T’ both are increasing. Similarly, in the period of depression ‘V’ and ‘T’ both are decreasing.
b. ‘MV’ and ‘T’ are not independent factors:-
Ans:- this theory assume that ‘MV’ ‘T’ are independent factor but it is not true. In real life ‘V’ and ‘T’ both are effected to each other. In special situation, ‘V’ affected by M and M affected by ‘V’.
c. ‘P’ is not a passive factor:-
Ans:- This theory assume that it is a passive factor but it is not true. In real life price level (P) increase than after quantity of money (M) increase such as in the period of them.
d. This theory doesn’t explain how price level (P) affected by quantity of money (M):-
Ans:- This theory assume that is direct relation between quantity of money (M) and price level (P) but it is not true there is indirect relation between quant of money (M) and price level (P). If quantity of money (M) increase in investment employment, income and lastly price level infinity.
e. One sided theory:-
Ans:- This theory gave more important on supply side of money not on demand side of money. The supply of money and demand for money is equal important in the determination of value of money. In this way, this is one sided theory.
f. Only one function of money:-
Ans :- According to this theory there is only one function of money such as medium of exchange. But there are several function of money, medium of exchange is also one of them.
5. Define the concept of inflation?
Ans:- Inflation means increase in general price level of goods and services or decrease in value of money. The value of money is its purchasing power. There is inverse relation between general price level of goods and service and value of money.
6. Define the concept of deflation?
Ans:- Deflation means decrease in general price level of goods and services or increase in the value of money. Deflation opposite of inflation. There is inverse relation between general price level of goods and services and the value of money.