Question

List the characteristics of money

Functions and motives of money

Fiscal and monetary policies (how to control money supply)

List the main functions of Commercial and Central Banks

Answer 1

1.Characteristics of money

1) Durability
It means money can be used over and over again for a long period of time and hence it must survive wear and tear due to its usage for such a long period. Greater durability can be achieved through online transactions.
2) Portability
It means it should be easy to carry around money wherever you go.
3) Divisibility
Money must be easily divided so that it enables a person to buy different products. A shop should offer different products that allows for different denominations.
4) Uniformity
It means standardization so that it looks the same.
5) Limited Supply
Money is valuable only if it is in limited supply.
6) Generally Acceptable
It means that the form of currency used must be acceptable. The value of currency should be acceptable for the survival of the business.
7) Hard to Counterfeit
It shouldn't be easily faked or copied.
8) Valuable
It should hold value over time.

2. Functions and motives of money

1) Unit of Account
The basic unit of account or measurement of anything and everything in an economy is money. It must form a uniform base for every transactions in the economy.  
2) Medium of exchange
All the needs and wants of humans can be satisfied by money as money gives us the ability to buy them all.
3) Store value
The most convenient way to store wealth is money as it can be used directly to buy any goods and services. i.e money is the most liquid asset. The value of money does not fluctuate and it has a fixed value.
4) Standard for Deferred Payment
Any payment that is to be made in future can be defined as deferred payment. The payment has to be made someday in the future and is done with money. This is possible because the value of money remains stable in the economy.

3. Monetary policy refers to the policy of the central banks in controlling the money supply by influencing the interest rates in the market whereas fiscal policy is the policy decisions by the government related to taxation and spending where also, the money supply in the market is regulated by legislations.

To control the money supply in the market, in case of monetary policy, the methods are:

1. Increase or decrease the statutory reserves of banks to affect the liquidity of money. Higher reserves indicate less liquidity and lower reserves indicate high liquidity.
2. Print more money in case of a liquidity crunch in market as a result of recession.
3. Open market operation by buying or selling government securities in the market.

In case of fiscal policy, government policy decisions can influence the money supply in the market.
1. In case of a recession or a disaster, the central government can relax the tax criteria by lowering down the tax slabs which can put more money in the hands of people. To decrease the money supply in the market, tax rates can be increased.
2. Government expenditure and revenue can be regulated in order to influence the economy. Assets. Investing in infrastructure or disinvestment prospects can influence the economy in different ways according to the situation. It in turn affects the money in the hands of people.
3. Fiscal policy always runs the risk of inflation to rise when government announces policy changes. This is caused by increase or decrease in demand and supply of goods in the market.

4.

Functions of central banks:

1) Issue of notes and coins
Notes are issued under the security of gold, silver, foreign currency and government. Notes and coins are issued only by central banks.
2) Banker of the bank
It acts as the bank of all banks. It provides rules and regulations to other banks and also accepts and lends money to commercial, development and other banks.
3) Bank of government
The money if government organization is deposited under their own name in the central bank.
4) Controller of foreign exchange
The foreign currency is conserved and it's flow is controlled by the central bank.
5) Government's agent and adviser
It acts as financial agent and provides advice while preparing the annual budget.
6) Controller of credit and money supply
It lends money with the motive of profit making from interests and controls inflation by several monetary methods.

Functions of commercial banks:

1) Accept money as deposit:
This deposit is the public savings and is of different types: current deposit, saving deposit and fixed deposit.
2) Lending money as loan:
It lends money to the public in their needs. It is lent to the public with high interest rates that deposits. The loans can be of different forms including cash credit, overdraft, term loans, discounting of bills etc.
3) Foreign currency transaction
Commercial banks accepts and exchanges foreign currencies.
4) Remittance of money
This method helps money from being displaced.