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Money is anything which performs the following four functions:
- Medium of Exchange - A measure of value
- A store of value over time - Standard for deferred payments
Money supply refers to the stock of money in circulation in the economy at a given point of time. This is partly exogenous (Decided by the Govt and the RBI) and partly endogenous.
Narrow Money (M1)= Currency with Public Demand Deposits with Banking System + ‘Other” Deposits with the RBI
M2 = M1+ Savings deposits of Post Office Savings Banks
M3 = M1+ Time Deposits with the Banking System
M4 = M3+ All Deposits with post office savings banks ( Excluding NSCs)
Currency with Public = Currency in circulation - Cash held by banks.
Demand – pull Inflation is a rise in general prices caused by increasing aggregate demand for goods and services.
Cost- Push Inflation is a type of inflation caused by substantial increases in the cost of production of important goods of services, where no suitable alternative is available.
In India WPI (Headline Inflation) is the official inflation index used for policy decisions.
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Interest is a payment made by a borrower for the use of a sum of money for a period of time.
J M Keynes theory is known as “Liquidity Preference Theory”
Rate of interest and bond prices are inversely related.
IS and LM curves Theory promulgated by Sir Hon Richard Hicks and Alvin Hansen. The IS curve and the LM curve relate the two variables a) Income and b) the rate of interest. The intersection point of the two curves is the equilibrium rate of interest.
LM= Liquidity preference and Money supply equilibrium. LM curve is derived from Kenes Liquidity preference theory of interest.
IS = Classical Theory
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