PPT: Monetary Policy | Indian Economy for UPSC CSE PDF Download

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Lecture 4 
Money & Monetary Policy
Prelims 2020 Crash Course 
Capstone IAS Learning
Page 2


Lecture 4 
Money & Monetary Policy
Prelims 2020 Crash Course 
Capstone IAS Learning
What will we cover
Concept of Money 
Demand and Supply side of Money 
Measures of Money Supply 
Money Multiplier 
Instruments of Monetary policy 
RBI: Role and Structure 
Monetary Policy Committee
Page 3


Lecture 4 
Money & Monetary Policy
Prelims 2020 Crash Course 
Capstone IAS Learning
What will we cover
Concept of Money 
Demand and Supply side of Money 
Measures of Money Supply 
Money Multiplier 
Instruments of Monetary policy 
RBI: Role and Structure 
Monetary Policy Committee
Money
A generally accepted medium of 
exchange with sovereign backing 
in the form of notes or coins 
which is used in our daily 
transactions is called Money. 
Before Money, “barter system” was 
used for exchanges. But “barter 
system” had a fundamental flaw 
called “Double Coincidence of 
Wants”. 
Thus, money acted as an 
intermediate good, acceptable to 
both parties, that solved the 
problem of “Double Coincidence 
of Wants”.
Page 4


Lecture 4 
Money & Monetary Policy
Prelims 2020 Crash Course 
Capstone IAS Learning
What will we cover
Concept of Money 
Demand and Supply side of Money 
Measures of Money Supply 
Money Multiplier 
Instruments of Monetary policy 
RBI: Role and Structure 
Monetary Policy Committee
Money
A generally accepted medium of 
exchange with sovereign backing 
in the form of notes or coins 
which is used in our daily 
transactions is called Money. 
Before Money, “barter system” was 
used for exchanges. But “barter 
system” had a fundamental flaw 
called “Double Coincidence of 
Wants”. 
Thus, money acted as an 
intermediate good, acceptable to 
both parties, that solved the 
problem of “Double Coincidence 
of Wants”.
Functions of Money : 
1. It acts as a medium of exchange 
2. It acts as a convenient unit of account 
3. It acts as a store of value 
4. It provides the required liquidity for conducting transactions.
While deciding on how much money to hold at a certain point of time 
one has to consider the trade-off between the advantage of liquidity 
and the disadvantage of interest foregone. 
Therefore demand for money is for 2 purposes : 
1. For transactions  
2. For Speculations
Page 5


Lecture 4 
Money & Monetary Policy
Prelims 2020 Crash Course 
Capstone IAS Learning
What will we cover
Concept of Money 
Demand and Supply side of Money 
Measures of Money Supply 
Money Multiplier 
Instruments of Monetary policy 
RBI: Role and Structure 
Monetary Policy Committee
Money
A generally accepted medium of 
exchange with sovereign backing 
in the form of notes or coins 
which is used in our daily 
transactions is called Money. 
Before Money, “barter system” was 
used for exchanges. But “barter 
system” had a fundamental flaw 
called “Double Coincidence of 
Wants”. 
Thus, money acted as an 
intermediate good, acceptable to 
both parties, that solved the 
problem of “Double Coincidence 
of Wants”.
Functions of Money : 
1. It acts as a medium of exchange 
2. It acts as a convenient unit of account 
3. It acts as a store of value 
4. It provides the required liquidity for conducting transactions.
While deciding on how much money to hold at a certain point of time 
one has to consider the trade-off between the advantage of liquidity 
and the disadvantage of interest foregone. 
Therefore demand for money is for 2 purposes : 
1. For transactions  
2. For Speculations
Demand for Money
Transaction Demand  
Transaction demand x 
Velocity =  Nominal GDP. 
Velocity - Number of times 
a unit of money changes 
hands in a unit period of 
time.
Speculative Demand 
It is inversely 
proportional to the 
market rate of 
interest.
Demand for money is a Stock Variable