Economics

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CREDIT MULTIPLIER

CREDIT MULTIPLIER Meaning of credit multiplier In the process of multiple credit creation,the total amount of derivative deposits created by the banks will be a multiple of initial excess reserves.The ratio between the total amount of derivative deposits and the initial amount of excess reserves is known as credit multiplier.It is reciprocal of cash reserve ratio(r) and denoted by k. Credit multiplier k = Total derivative deposits/Initial excess reserves Credit multiplier k = 1/ cash reserves ratio (r) Assumptions 1)The cash reserve ratio remains constant through all the stages of credit creation process. 2)The banks adjust their assets in such a manner as to maintain a fixed relationship between their deposit liabilities and cash reserves. 3)There is no leakage in credit creation process.It means the excess reserves are turned into derivative through granting loans and the derivative deposits in turn become prim

ROLE OF COMMERCIAL BANKS

ROLE OF COMMERCIAL BANKS Banks are considered not mere as dealers in money but also the leaders in the development. Banks ,in the modern economy plays an important role in the progress of country.The economic progress in the present day in the developing economies largely depends upon the growth of sound banks system in these economies. The following are contribution of commercial banks in the economic development of the economy :- a) Capital formation - Capital formation is the most important factor of economic development and banks promote capital formation.It consists of 3 stages. -generation of saving -mobilisation of saving -canalisation of saving Bank plays an important role by -stimulating savings by providing number of incentives to savers . -by expanding their branches in different areas and giving various incentives,they succeed in mobilising the savings . b) Economic activity : Banks influence economic activity,and hence pace of economic development through its influence o

CREDIT CREATION

MEANING Of CREDIT CREATION A bank differs from other financial institutions because it can create credit.Banks have the ability to expand their demand deposits as a multiple of their cash reserves. Multiple expansion of deposits is called credit creation . Bank credit means bank loans and advances ,a bank keeps a certain .The bank loan is not paid directly to borrower but is only credited in his account. Every bank loan creates an equivalent deposit in the Bank. Thus,credit creation means multiple expansion of Bank deposits. Creation refers to the ability of the Bank to expand deposits as a multiple of its reserves. To conclude , Credit creation refers to the unique power of banks to multiply loans and advances, and hence deposits through the process of making loans or investment in securities. The banks create additional purchasing power with just a little cash in hand. Basic concepts a) Bank deposits : This forms the basis of credit creation. It is of two types : - Primary deposits

MEANING OF COMMERCIAL BANKS

MEANING OF COMMERCIAL BANKS Commercial banks are those banks which perform all kinds of banking business and generally finance trade and commerce are called commercial banks . These banks normally advance short term loans to the businessmen and traders .Lately , the commercial banks have extended their areas of operation to medium term and long term finance . Majority of commercial banks are in the public sector. FUNCTIONS of commercial banks a) Accepting deposits : Banks accept deposits from those who can save but cannot profitably utilise these savings themselves. People consider it more deposit their Savings in a bank because of doing so they,on the one hand earns interest and on the other hand avoid the danger of theft . Different types of accounts -Fixed deposit account -Current deposit account -Saving deposit account -Recurring deposit account -Home safe account b) Advancing of loans :Banks advances loans to the public. After keeping certain cash reserves,the banks lend their

MEANING AND TYPES OF BANK

MEANING AND TYPES OF BANK Meaning of Bank : A Bank is an institution which deals with the money and credit. It accepts deposits from the public,makes the funds available to the needy and helps in transfer of money from one place to another. Features of the Bank a)It deals with money, it accepts deposits and advances loans. b)It has the ability of creating credit system. c)It is commercial institution which aims at earning profit. d)It is financial institution that creates demand deposits which serve as a medium of exchange and as a result,the banks manages payment system of the country. Types of Banks a) Commercial Banks : The Banks which perform all kinds of banking business and finance trade and commerce are called as commercial banks. These Banks offer short term loans to businessman and traders but lately also offers medium term and long term loans. b) Industrial Banks : Industrial Banks meet the medium term and long term needs of the industries .These are also called as inv

DISADVANTAGES OF MONEY

DISADVANTAGES OF MONEY a) Misuse of capital - Money leads to creation of more and more credit .Credit creation if not matched by the increase in production results in inflation. b) Over capitalisation - Easy borrowing and lending facilities, made possible through money may lead certain industries to use more and more capital than require which results in over capitalisation , overproduction and unemployment. c) Monopolies - Money leads to concentration of wealth in a few hands and thus give rise to Monopolies which results in exploitation of workers . d) Inequality of income - Money through its excessive use and inflationary effect creates and widens inequalities in the distribution of income and wealth. e) Political instability - Wide fluctuations in prices and buisness activities caused by money leads to political instability . f)Economic instability - The value of money does not remain constant which creates economic instability in the economy . Too much money reduces it'

ADVANTAGES OF MONEY

ADVANTAGES OF MONEY a) Removal of Barter system difficulties - Money has helped in overcoming the difficulties of Barter system such as need for double coincidence of wants ,lack of common measure of value , lack of divisibility and many others. b) Importance in socialist economy - Socialism is an economic system which is controlled and regulated by government so as to ensure welfare to the society . Money has helped the socialist economy in number of following given ways : 1)Money acts as measure of value . The value of goods and services is expressed in terms of money . 2)Money performs the function of circulation as all buying and selling is done through money. 3)Money provides the Medium of payment when wages are paid to workers , entrepreneur receives loans etc. 4)Money that is saved are used by state to expand production reserves and provide credit. 5)Working people receive a share of national product in terms of money according to their quality and quantity they expended.

FUNCTIONS OF MONEY

FUNCTIONS OF MONEY Various functions of Money can be classified into three broad groups: a) Primary functions b) Secondary functions c) Contingent functions d) other functions Primary functions a) Medium of exchange : Money must be commonly accepted by the people in exchange of goods and services to be successful medium of exchange.Money benefits the society in number of ways as a medium of exchange. -It offers sales and purchases through money. -It promotes transactional efficiency. -It allows freedom of choice . b) Measure of value : Money serves as common measure of value in terms of which value of all goods and services is measured and expressed. It has made transactions easy and simplifies the problem of measuring and comparing prices of goods and services. c) Unit of account : As a unit of account, it helps in developing an efficient accounting system . It provides basis for keeping account ,estimating national income,cost of a project etc. Secondary functions a) Standard of

NEAR MONEY

NEAR MONEY Meaning : Those assets which cannot be technically regarded as money,but are claims to money and perform some functions of money. Such assets are called as Near money. Characteristics of near money a) It possess characteristics of money. b) It have high degree of liquidity c) It can be converted into money. d) It cannot be directly used for making transactions. e) It is close substitute of money. Types of near money a) Bill of exchange - It is a promise to pay a specified amount of money in specified date ,generally after 3 months. It may be of different types : 1) Commercial bills are drawn in connection with commercial transactions. 2) Finance bills are drawn when a person lends money to other person . 3) Treasury bills are finance bills through which government raises short period funds. b) Bond - It is a promise to pay a fixed sum of money by way of interest annually for specified number of years and to repay capital sum borrowed at the end of period. This method

CLASSIFICATION OF MONEY

CLASSIFICATION OF MONEY a) Money proper and Money of account Money proper is the money which is in circulation in a country. It is medium of exchange and means of payment . Rupee note and coin is Money proper in India. Money of account is that in which accounts are maintained.Process of goods ,purchasing power debts etc are Money of account. While the Indian rupee as money of account has remained same,the actual , Indian rupee has been experiencing change in its weight ,size and content from time to time. Types of money proper 1) Commodity money and representative money Commodity money is made up of metal and its face value is equal to its intrinsic value. With being medium of exchange ,it also serves as store of purchasing power. It is also called as full bodied money. Representative money is the money which is not full bodied and is still in circulation. Its materially value is greater than the value of stuff of which it is composed.Paper money is its example. b ) Legal tender and

EVOLUTION OF MONEY

EVOLUTION OF MONEY History of money Increasing difficulties and inconvenience led to the invention of money.Money was first used as a unit of account or a numeraire in terms of which all other things were to be measured and compared. It allowed the process of goods to be expressed in terms of common unit of account,made non - comparable goods comparable but still ,trading was simple exchange of goods as process were priced in terms of one standard commodity . This difficulty was removed , When unit of account become medium of exchange also which saves time and lot of effort. Development of money There are different stages of development of money in accordance with the growth of human civilization. a) Animal money - In primitive agricultural communities,domestic animals were used as money . Cattle were considered the common instrument of exchange.Cow and sheep were accepted as common wealth in ancient times. b) Commodity Money -A number of commodities like bows,arrows,shells,rice etc

BARTER SYSTEM

BARTER SYSTEM Meaning of Barter system of exchange Before money came into existence, exchange took place with the system of BARTER. Barter system refers to the exchange with the help of goods . It means direct exchange of goods without using money. Advantages a)It is simple system without complexity of monetary system. b)There is no worries regarding over or under productions of goods. c)There is no problems of international trade. d)Personal and natural resources are utilised to meet needs of society. Disadvantages a) Double coincidence - Under Barter system, a double coincidence of wants is required for exchange. For instance , if person A wants clothes in exchange of horse , then he must have to find the person who has need for horse and can exchange it for clothes. b) Absence of common measure of value - Since there is no common measure in terms of which the value of commodity can be expressed, the problem arises how much wheat should be exchanged for how many pairs of shoes.