What is Money and Banking Class 12: Complete Economics Guide

Definition and Meaning of Money

Money is any item or verifiable record accepted as payment for goods and services and repayment of debts. In Class 12 NCERT Economics, money is defined as a medium of exchange that facilitates trade by eliminating the inefficiencies of barter.

Money serves as:

• A medium of exchange
• A unit of account
• A store of value
• A standard of deferred payment

Without money, barter trade would require a coincidence of wants, which is inefficient for a growing economy like India’s.

Functions of Money Explained

Money performs four main functions:

1. Medium of Exchange: It facilitates buying and selling without barter. 2. Unit of Account: Money provides a common measure to value goods and services. 3. Store of Value: It allows people to save purchasing power for the future. 4. Standard of Deferred Payment: Money is accepted to settle debts payable in the future.

These functions make money indispensable in the economy and form the basis of the Class 12 NCERT chapter.

Types of Money: Commodity vs Fiat Money

Money can be broadly classified into two types:

India uses fiat money, which is backed by government authority rather than physical commodities.

Overview of Banking and Its Role in the Economy

Banking refers to institutions that accept deposits and provide loans. Banks play a crucial role in mobilizing savings and channeling funds for investment, thus promoting economic growth.

Key functions of banks include:

• Accepting deposits
• Granting loans and advances
• Credit creation
• Agency functions like payment of bills

The Reserve Bank of India (RBI) regulates banking operations, ensuring financial stability and controlling money supply.

Money Supply and Its Components

Money supply refers to the total amount of money available in the economy. It is classified into four categories:

• M1: Currency + demand deposits + traveler's cheques
• M2: M1 + savings deposits with post office savings banks
• M3: M1 + time deposits with banks (broad money)
• M4: M3 + total deposits with post office savings banks

Understanding money supply helps in analysing inflation and economic policies.

Worked Example: Calculating Money Supply (M1)

Suppose the following data is given:

• Currency with public = ₹5000 crore
• Demand deposits = ₹3000 crore
• Traveler's cheques = ₹200 crore

Calculate M1 money supply.

Using the formula:

$$M1 = Currency + Demand Deposits + Traveler's Cheques$$

$$M1 = 5000 + 3000 + 200 = ₹8200 \, crore$$

This example shows how to compute the narrow money supply, important for understanding liquidity.