Macro Economics: Money and Banking

Flashcards covering the definitions and concepts of money, banking, measures of money supply, and monetary policy tools based on the Class 12 Macro Economics curriculum.

Money

The most often used means of exchange; there is no role for this in an economy consisting of only one person.

Barter Exchange

The oldest form of commerce in which one product or service is exchanged for another, based on equivalent prices and good estimates.

Functions of Money (Primary)

Broadly classified as a mode of exchange and a common measure of value or common unit of value.

Functions of Money (Secondary)

Includes value storage, value transfer, and serving as a deferred payment standard.

Demand of Money

Also referred to as an individual's liquidity preference, it is the decision to hold cash in order to earn interest or as a precaution.

Transaction Motive

The drive to hold specific cash amounts for the purpose of carrying out transactions.

Speculative Motive

Refers to funds retained by investors in order to capitalise on potential investment opportunities in the economy.

Aggregate Money Demand ($M_d$)

The entire demand for money in an economy made up of transaction demand ($M$) and speculative demand ($M^d$), expressed as $M_d = M + M^d$.

Fiat Money

Currency that a government declares to be legal tender but is not backed by a physical asset; its value is determined by supply and demand.

Supply of Money

The total money held by the public at a particular point in time, excluding cash balances held by national/state governments and the banking system.

$$M_1$$

The first and basic measure of money supply, calculated as $M_1 = \text{Currency and coins (C)} + \text{Demand deposits (DD)} + \text{Other deposits (OD)}$.

$$M_2$$

A measure of narrow money calculated as $M_1 + \text{Savings deposits with Post Office saving banks}$.

$$M_3$$

Known as broad money, it is calculated as $M_1 + \text{Net time deposits with commercial banks}$.

$$M_4$$

A measure of broad money calculated as $M_3 + \text{Total post office deposits excluding National Saving Certificates (NSC)}$.

Commercial Bank

A profit-making financial organisation that handles deposits, withdrawals, and provisions of loans; examples include State Bank of India and Canara Bank.

Central Bank

The highest financial institution and independent authority in charge of supervising, regulating, and stabilising a country's monetary and banking structures.

Currency Deposit Ratio ($cdr$)

Depicts the amount of currency held by individuals as a percentage of total deposits, calculated as $cdr = \frac{CU}{DD}$.

Reserve Deposit Ratio ($rdr$)

The percentage of total deposits that commercial banks retain as reserves, consisting of vault cash and deposits with the RBI.

Cash Reserve Ratio (CRR)

The portion of a bank's total deposits that the Reserve Bank of India requires to be kept with it as liquid cash reserves.

Statutory Liquidity Ratio (SLR)

The reserve requirement that banks must maintain before extending credit to customers.

Bank Rate

The interest rate charged by a nation's central bank to its domestic banks for borrowing money in order to stabilise the economy.

High Powered Money

Money created by the RBI and the government; it serves as a foundation for creating demand deposits and is held as public currency and bank cash reserves.

Open Market Operation

A quantitative measure involving the central bank's selling and purchase of securities on the open market to/from commercial banks or the public.

Bank Rate Policy

A qualitative measure referring to the central bank's manipulation of the discount rate to influence the economy's credit condition.

Sterilisation by RBI

The RBI's market-based strategy for neutralising a portion or the whole of the monetary impact of foreign inflows.