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Classical and Keynesian Approaches to Money Demand

• Classical Approach: Emphasizes the quantity theory of money, which posits that changes in the money supply have direct, proportional effects on price levels.

• Keynesian Approach: Focuses on the liquidity preference, suggesting that the demand for money is influenced by interest rates and the overall economic activity.

Real Balances

• Real balances refer to the purchasing power of money assets, emphasizing that the demand for money is dependent on the real value of money in an economy.

Friedman’s Approach

• Milton Friedman argues that the demand for money is a function of permanent income rather than current income, leading to a deeper understanding of consumption and saving behavior.

Budget Deficit and Money Supply Relation

• A budget deficit occurs when spending exceeds revenue, often leading to a higher money supply as governments may borrow or print money to finance the deficit. This relationship can affect inflation, interest rates, and overall economic stability.

RBI Approach to Money Supply

• The Reserve Bank of India (RBI) controls the money supply through various tools and policies, aimed at maintaining economic stability and controlling inflation.

Functions and Objectives of Commercial Banks

• Functions: Accepting deposits, providing loans, and offering financial services.

• Objectives: Profit maximization, risk management, and maximizing customer satisfaction while ensuring compliance with regulatory norms.

Evolution of Commercial Banks

• The development of commercial banks from simple deposit-holding institutions to complex financial entities playing a crucial role in economic development and financial stability.

Central Bank and Its Functions

• Central Bank: The institution responsible for managing a country's currency, money supply, and interest rates.

• Functions: Issuing currency, managing foreign reserves, overseeing commercial banks, and formulating monetary policy.

Monetary Policy Tools

• Quantitative Measures: Involve changing the amount of money in circulation.

• Qualitative Measures: Focus on regulating the flow of credit.

• Open Market Operations: The buying and selling of government securities to control the money supply.

Key Banking Terms

• Bank Rate: The rate at which the central bank lends money to commercial banks.

• Repo Rate: The rate at which the central bank lends money to banks against securities.

• SLR (Statutory Liquidity Ratio): Minimum percentage of deposits that banks must keep in the form of liquid cash, gold, or other securities.

• CRR (Cash Reserve Ratio): The percentage of a bank's total deposits that must be held in reserve with the central bank.

RBI Roles and Functions

• The RBI not only formulates and implements monetary policy but also plays a role in financial regulation, currency issuance, and managing payment systems.

Monetary Policy of RBI

• The Reserve Bank of India's monetary policy aims to maintain price stability while promoting economic growth, utilizing tools such as interest rates and reserve ratios.

LAF and MSF

• LAF (Liquidity Adjustment Facility): A tool used by the RBI to manage liquidity through enabling banks to borrow money through repurchase agreements.

• MSF (Marginal Standing Facility): Allows banks to borrow overnight funds from the RBI at a rate higher than the repo rate for emergency situations.

Money Market and Its Types

• The money market deals with short-term borrowing and lending. Types include treasury bills, commercial paper, and certificates of deposit.

Capital Market Features

• Involves the issuance and trading of long-term securities, providing businesses with funding and offering investors portfolio opportunities.

Treasury Bills and Commercial Bills

• Treasury Bills: Short-term government securities issued for less than one year.

• Commercial Bills: Short-term unsecured promissory notes used to finance business transactions.

Evolution of Paper Money

• The transition from commodity money to paper currency, enhancing the efficiency of trade and economic transactions.

Derivatives and Options

• Derivatives: Financial contracts whose value is derived from the performance of underlying assets.

• Options: Contracts that give the holder the right but not the obligation to buy or sell an asset at a specified price within a specified time frame.

Primary and Secondary Markets for Securities

• Primary Market: Where securities are created and sold for the first time.

• Secondary Market: Where existing securities are traded among investors.

SEBI and Its Features

• The Securities and Exchange Board of India (SEBI) regulates the securities market, ensuring investor protection and fair market practices.

Financial Sector Reforms

• Changes implemented to enhance the efficiency, transparency, and resilience of financial institutions and markets.

Financial Sector Committee and Its Functions

• Various committees set up to analyze and recommend reforms in the financial sector focusing on improving economic inclusion and stability.

• Examples of committees: Narasimham Committee, P. J. Nayak Committee.

Financial Growth and Inclusion

• Emphasizes the importance of providing access to financial services for all segments of society to foster economic development and reduce poverty.