Thursday, October 11, 2007


Q.What is money?
Money acts as an intermediate in the exchange process & it is called medium of exchange.
In many of our day to day transactions, goods are being bought & sold with the use of money.
--at times we do exchange services with money.
--use of money has made things easier to exchange as we can exchange it for any commodity we need.
Q.Why transactions are made in money?
The reason as to why transactions are made in money is that , a person holding money can easily exchange it for any commodity or service that he or she wants.
Q. What is double coincidence of wants?
When in the exchange, both parties agree to sell and buy each others commodities it is called double coincidence of wants. In the barter system double coincidence of wants is an essential feature.
In the earlier times, before the introduction of coins, a variety of objects were used as money. Since ancient times we Indians used metallic coins of –silver, gold & copper—a phase that continued into the last century.
In the modern times
Modern forms of money include currency—paper notes & coins.
--it is not made of precious metals as gold, silver ,copper

--like grains, cattles etc. it is of not of day to day use.It is without any use of its own.
Why have we accepted it as medium of exchange?
--It is accepted as a medium of exchange because the currency is authorized by the govt. of India
--RBI issues notes on the behalf of central govt.
--the law legalizes the use of rupee as a medium of payment that can not be refused in settling.
transactions in India.

--People need only some currency for their day to day needs.For instance workers who receive their salaries at the end of each month, have some extra cash.They deposit it with the banks by opening a bank account in their name.
Bank accept the deposits and also pay an interest rate on the deposits.
Q. Why do people deposit money in the banks?
People deposit money in the banks because :
it si safe with the banks
--it earns an interest.
--people also have the provision to withdraw money as and when they require.
Q. What is Demand deposit?
--Since the deposits in the banks accounts can be withdrawn on demand, these deposits are called demand deposits.
--Demand deposits offer another facility that is the facility which lends it an essential characterstics of money, ie.,the payment made by cheques.
The payer who has an account with the bank, makes out a cheque for a specific amount.
This facility of cheques against demand deposits makes it possible to directly settle payments with the use of cash.
--Since demand deposits are accepted widely as a means of payments,along with currency,they constitute money in the modern economy.
Q. What is a cheque?
Cheque is paper insturcting the bank to pay a specific amount to the person in whose name the cheque has been made.
Q.Why demand deposits are considered as money?
Because they share essential features of money.
Q.What do banks do with the deposits which they accept from the public?
Banks keep only a small proportion of their deposits as cash with themselves, as a provision to pay the depositiors who might come to withdrawfrom the bank on the given days.
--These days Indian banks hold about 15% of their deposits as cash.
--Banks use their major portion of the deposits to extend loans, there is huge demand of loans for various economic activities.
--Banks mediate between those people who have surplus funds (depositors) and those who are in need of those funds(the borrowers).
--banks charge higher rate of interest on the loans than what they offer on deposits.The difference between what is charged from borrowers and what is paid to thee depositors is their main source of income.
Alarge number of transactions in our day to day activities involve credit in some form or the other.
it refers to an agreement in which lender supplies the borrowers with money, goods, services in return for the promise of future payments.

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