What email address or phone number would you like to use to sign in to Docs.com?
If you already have an account that you use with Office or other Microsoft services, enter it here.
Or sign in with:
Signing in allows you to download and like content, and it provides the authors analytical data about your interactions with their content.
Embed code for: chapter 1-FM-DOC
Select a size
DEPARTMENT OF COMMERCE
SEMESTER V CHAPTER-1
AN INTRODUCTION TO MONEY
1. What do mean by barter system and explain its demerits?
1. In the early stages of human civilization human needs were simple and every individual was able to produce all that he needed to maintain himself.
2. Human beings did not invent money and the only way to meet ones requirement of other goods was through exchange of what one had and what one wanted. This system of exchange is called barter system.
3. In the initial period of civilization the barter system worked well but as civilization started to advance and expand, this system had many inadequacies.
4. Under barter system, no exchange can take place unless the wants of two persons coincide. Double coincidence of wants was a necessary condition.
5. Under barter system there was no common measure of value of commodities.
6. Under barter system, some commodities could not be divided into parts without reduction in their value.
7. Under barter system, it was difficult to store certain commodities on account of their perishable quality.
8. Under barter system, it was very difficult to make payment on deferred basis as the commodities were exchanged immediately on delivery.
9. Under barter system, exchanging services was very difficult than exchange of goods.
10. Under barter system, there was lot of inconvenience to transport commodities from one place to the other.
Page no: 2
2. Discuss about evolution of money and define its characteristics?
1. Money was a human invention to overcome the inadequacies in the barter system. Geoffrey Crowther in his book “An outline of money” said that money is one of the fundamentals of all human invention”
2. The word money is derived from the Italian word “Moneta” which refers to the name of the Roman Goddess Juno in whose temple at Rome coins were minted.
3. Commodity money forms the first and foremost stage of evolution of money. In the hunting age hides were used as money and in pastoral age, live stocks were used as money.
4. Metallic age is called the second stage of evolution. Metals like gold, silver, copper and iron were used as money. These metals were precious, durable and superior to hides and live stocks.
5. Paper money was the third stage of evolution. When printing press was invented, Paper money was introduced and it was made a legal tender.
6. The main characteristic of money is its acceptability. It is acceptable for exchange of all goods and services without hesitation.
7. Money is easily and conveniently portable and it can be easily taken from one place to the other due its size and less weight.
8. Since it is a legal tender of a country it is recognized in various denominations.
9. It is highly elastic. It can be expanded or contracted according to the commercial needs.
10. It is easily manageable. The quantity in circulation can be contracted or expanded by the authorities to bring monetary stability in a country.
11. It is durable in the sense that if it is properly preserved. The currency notes are printed on a thick treated paper so that it should last for a longer term. Of course durability is directly proportional to wallet culture adopted by citizens.
Page no: 3
12. It is divisible as the authorities print currency notes in various denomination so that a common man can exchange the currency notes for purchase of small quantity of goods and services.
13. It has homogeneity. Good money has uniform in quality and quantity.
3. Explain in detail several of kinds of money?
1. Money of account: - Money of account is the money in terms of which accounts are maintained. In our country rupee and Paise are money of accounts. J.M.Keynes in his book “A treatise on money” defines money of account as “money of account is that in which debts and price and general purchasing power are expressed”
2. Money proper: - Money proper is also known as common money. Money proper is defined as that money which consisting of coins of different metals and paper currency notes backed by the government of a country.
3. Commodity money: - it is composed of some freely obtainable, non monopolized commodity chosen as money. It is also known as “full bodied money” because the real value of the material used is equal to its face value.
4. Representative money: - it refers to that money which is made either of cheap metal or convertible paper money.
5. Full bodied money: - it is that paper money contains a promise by the authorities to the bearer of the money that he/she would get equivalent value of bullion in exchange.
6. Token money: - it is that paper money where the bearer will not get full value of bullion as in the case of full bodied money. The face value of token money is higher than intrinsic value of money.
7. Fiat money: - it is legal money which is circulated in the country by the formal command of the government. Fiat money generally consists of paper currency and inconvertible bank notes of different denominations. Initially fiat money was originated in the exigencies of war finance.
Page no: 4
8. Optional money: - it refers to that money which may or may not be accepted in the discharge of debts. For example bank cheques are example for optional money.
9. Legal tender money: - it is money backed by law of the land to accept in the discharge of debts. It is accepted as medium of exchange by law. Refusing to accept the legal tender money is punishable by the Government.
10. Legal tender money is being practised in the entire countries world over. This has made exchange of money among the people easy and portable.
4. Discuss in detail on functions of money?
1. Money performs 4 functions. They are a medium of exchange, a measure, a standard and a store.
2. These 4 functions are broadly put in three categories- Primary function, secondary function and contingent function.
3. Under primary function, money is considered as a passive tool. It has been considered as common medium through which goods and services are exchanged. It is also a medium through which the value of goods and services are measured.
4. Under primary functions, it helps in the smooth operation of all exchange transactions. It gives great deal of economic independence. It perfects market mechanism by encouraging healthy competition in the markets.
5. Under primary functions, it helps national and international trade.
6. Under primary functions, the money serves as common measure of value of goods and services or as a unit of account. As a measure of value, money serves as a common denomination representing the value of goods and services in terms of price.
7. Under secondary function money has been considered as a dynamic tool. It is considered as a valuable medium through which goods and services are stored for future use.
Page no: 5
8. Under secondary function, it acts as a standard for deferred payments. For example goods and services are sold in credit where value is received but payment is made in the future date.
9. Under secondary function, money also serves as a transfer of value. It facilitates transfer from one person to another and one place to another.
10. Under contingent function, money facilitates in measurement and distribution of national income in any economy. It facilitates both producers and consumers to maximize their satisfaction.
11. Under contingent function, it facilitates credit purchase and sales. So it is the basis of credit system. It facilitates transformation of savings from the household sector into investment in business sector.
5. Explain the advantages and disadvantages of money?
1. Money and consumption: money enables every consumer to generalize his purchasing power. It gives the consumer to command over anything he wants to buy. It provides freedom of choice of consumption.
2. Money and production: Money enables the producer to concentrate his attention on the organization of the production process. This will add effectively to the general flow of goods and services. Money has made division of labour in the modern industrial production possible. Without money, production on a large scale would be impossible.
3. Money and exchanges: Money facilitates exchange of goods and services on easy terms without any difficulty. It has been the basis of price mechanism in the modern society. Money facilitates trade by serving as a medium of exchange.
4. Money and distribution: Money enables the organizer to distribute the shares of all factors of production in the form of rent, wage, interest and profit. It also facilitates to make loans and payments of all kinds in advance.
5. Money and public finance: money is of great significance in public finance. Modern governments are welfare states. They participate in all economic
Page no: 6
activities. Without the use of money, no policy can be devised and implemented by the government. Government activities can be expanded only with the use of money. So, money helps to achieve economic stability.
6. Instability of value: The main evil of money is instability. The value of money does not remain stable. Such instability is due to inflation and deflation. The inflation reduces the purchasing power of money and deflation brings gloom and instability.
7. Inequality in Income: Money is the main culprit in bringing inequality in Income. Rich are becoming richer and the poor are becoming poorer is very true in a market economy where money plays a predominant role.
8. The inequality of income produces civil unrest and hatred by the have-nots on the haves. This is a dangerous situation to any country. Any welfare state should strive for bridging the gap between the haves and the have-nots.
9. Root of all vices: More money beyond the level of requirement brings all the evil habits in the people which slowly and steadily degenerates the society. The concern for social commitment vanishes and self centeredness grows.
10. With all the demerits money plays a vital role in any economy and it is the measuring rod for the prosperity of nations and its subjects. Money has made countries in the world dynamic, innovative and growth oriented.
6. Explain the role of money in a capital economy?
1. Capitalist economy is an economy in which all the means of production are owned and managed by private individuals and corporate.
2. It is a free market economy where everything is left to market mechanism. Market mechanism is predominant under capitalist economy.
3. These marker forces determine the prices for goods and services bought and sold in the market.
4. Price mechanism is the main pillar of the capitalist economy. The price mechanism is expressed in terms of money. All important decisions are made with the help of price mechanism under capitalist economy.
Page no: 7
5. The capitalist economy is characterized by the existence of private enterprise, absence of central economic plan, consumers’ sovereignty, system of inheritance, economic freedom of individual initiative and freedom of choice.
6. Money plays a significant role in a capitalist economy. Consumers are free to choose within certain limits what goods and services to buy and how much to buy. Consumers are free to spend money as they like. They also have freedom to save a part of their income.
7. The capitalist economy is not tightly regulated, planned or controlled by the state or its agencies. In a capitalist economy consumer is a king as production of goods and services are carried out as per his wish and choice.
8. In a capitalist economy, the producer employs a number of factors of production and to all he makes payment in money. The reward for all these factors of production is determined by the price mechanism.
9. The rewards are fixed according to demand for and supply of factors of production. When the demand for the factors increases, the process of these factors will rise as a result they get higher rewards.
10. Money has certain disturbing impact on the capitalist economy. Whenever there is a continuous rise or fall in prices, certain section of society is adversely affected. Continuous change in prices quite often and is common in a capitalist economy. Changes in value of money quite often have serious economic and social impact.
****************************************************************sy terms without any difficulty. It has been the basis of price mechanism in the modern society. Money facilitates trade by serving as a medium of exchange.
10. Money has certain disturbing impact on the capitalist economy. Whenever there is a continuous rise or fall in prices, certain section of society is adversely affected. Continuous change in prices quite often and is common in a capitalist economy. Changes in value of money quite often have