PPT: The Concept of Money Demand: Important Theories | Business Economics for CA Foundation PDF Download

 Page 1


The Concept of Money Demand: 
Important Theories
Page 2


The Concept of Money Demand: 
Important Theories
Definition of Money
Store of Value
Allows people to save and 
use it later, helping them 
manage purchases over time.
Unit of Account
Provides a common basis for 
pricing goods and services.
Medium of Exchange
Facilitates buying and selling 
between people.
Page 3


The Concept of Money Demand: 
Important Theories
Definition of Money
Store of Value
Allows people to save and 
use it later, helping them 
manage purchases over time.
Unit of Account
Provides a common basis for 
pricing goods and services.
Medium of Exchange
Facilitates buying and selling 
between people.
Importance and Characteristics of Money
Without Money:
We would rely on barter system
Trade becomes extremely difficult
Example: Mechanic needing food must find 
farmer with broken car
Historical Forms:
Cowry shells, barley, peppercorns
Gold and silver
Paper claims to metal
Modern fiat currency
Fiat Money Development:
Gold/silver deposits in banks
Paper notes as claims to metal
Transition to materially worthless currency
Value based on collective agreement
According to RBI: "Money is a set of liquid 
financial assets that can influence overall 
economic activity."
Page 4


The Concept of Money Demand: 
Important Theories
Definition of Money
Store of Value
Allows people to save and 
use it later, helping them 
manage purchases over time.
Unit of Account
Provides a common basis for 
pricing goods and services.
Medium of Exchange
Facilitates buying and selling 
between people.
Importance and Characteristics of Money
Without Money:
We would rely on barter system
Trade becomes extremely difficult
Example: Mechanic needing food must find 
farmer with broken car
Historical Forms:
Cowry shells, barley, peppercorns
Gold and silver
Paper claims to metal
Modern fiat currency
Fiat Money Development:
Gold/silver deposits in banks
Paper notes as claims to metal
Transition to materially worthless currency
Value based on collective agreement
According to RBI: "Money is a set of liquid 
financial assets that can influence overall 
economic activity."
Key Characteristics of Money
Generally Acceptable
Money should be widely 
accepted as a medium of 
exchange.
Durable
Money should have a long 
lifespan and not deteriorate 
quickly.
Recognizable
It should be easy to identify and 
distinguish money from other 
items.
Difficult to Counterfeit
Money should be hard to 
reproduce, preventing 
fraudulent activities.
Scarce with Elasticity
While money should be scarce, 
its supply should be adjustable 
to meet demand.
Portable, Uniform & Divisible
Easy to carry, identical units, 
and divisible into smaller units 
without losing value.
Page 5


The Concept of Money Demand: 
Important Theories
Definition of Money
Store of Value
Allows people to save and 
use it later, helping them 
manage purchases over time.
Unit of Account
Provides a common basis for 
pricing goods and services.
Medium of Exchange
Facilitates buying and selling 
between people.
Importance and Characteristics of Money
Without Money:
We would rely on barter system
Trade becomes extremely difficult
Example: Mechanic needing food must find 
farmer with broken car
Historical Forms:
Cowry shells, barley, peppercorns
Gold and silver
Paper claims to metal
Modern fiat currency
Fiat Money Development:
Gold/silver deposits in banks
Paper notes as claims to metal
Transition to materially worthless currency
Value based on collective agreement
According to RBI: "Money is a set of liquid 
financial assets that can influence overall 
economic activity."
Key Characteristics of Money
Generally Acceptable
Money should be widely 
accepted as a medium of 
exchange.
Durable
Money should have a long 
lifespan and not deteriorate 
quickly.
Recognizable
It should be easy to identify and 
distinguish money from other 
items.
Difficult to Counterfeit
Money should be hard to 
reproduce, preventing 
fraudulent activities.
Scarce with Elasticity
While money should be scarce, 
its supply should be adjustable 
to meet demand.
Portable, Uniform & Divisible
Easy to carry, identical units, 
and divisible into smaller units 
without losing value.
How Money is Measured
Broad Money Components (IMF):
National Currencies: Issued by central 
government
Transferable Deposits: Demand deposits, 
bank checks, travelers checks, foreign-
currency deposits
Other Deposits: Nontransferable savings 
deposits, term deposits, repurchase 
agreements
Securities Other Than Shares: Tradable 
certificates of deposit, commercial paper
In official statistics, the measurement of 
money in an economy is typically done 
through the concept of broad money.
Broad money includes all financial assets that 
provide a store of value and liquidity.
Liquidity refers to the ease with which 
financial assets can be converted into cash or 
another form of money at short notice, close 
to their full market value.