Money and Banking
Yeh textbook B.A. 5th Semester Money and Banking paper ke liye hai. Iss me Fisher ka MV=PT Equation, Cambridge M=kPY Cash Balance Approach, Commercial Bank Credit Creation Multiplier, RBI Monetary Policy (Repo Rate, CRR, SLR, OMO), Money Supply M1-M4, Banking Sector Reforms, NPAs aur IBC 2016 ko simple Hinglish me samjhaya gaya hai.
Money and Quantity Theories
Money barter system ki sabse badi samasya "Double Coincidence of Wants" ko khatam karta hai. Money ke functions ko 3 categories me divide kiya jata hai: Primary, Secondary, aur Contingent functions.
Money ke Functions ka Classification:
- Primary Functions (Prathmik Karya): Medium of Exchange (khareed-bech ko aasan banana) aur Unit of Account (cheezon ka price tay karna).
- Secondary Functions (Gyaun Karya): Standard of Deferred Payments (future/debt payment ki suvidha) aur Store of Value (sampatti ko surakshit rakhna).
- Contingent Functions: National Income ka distribution, marginal utility barabar karna, aur credit system ka aadhar banana.
Where: $M = \text{Primary Currency}$, $V = \text{Velocity of Currency}$, $M' = \text{Bank Credit Money}$, $V' = \text{Velocity of Credit}$, $P = \text{Price Level}$, $T = \text{Volume of Transactions}$.
Solved Numerical Example:
Problem: Given currency supply $M = \$1,000$, velocity $V = 5$, credit money $M' = \$500$, velocity $V' = 4$, and transaction volume $T = 1,400$ units. Calculate price level ($P$).
Solution:
$MV + M'V' = PT \implies (1000 \times 5) + (500 \times 4) = P \times 1400$
$5000 + 2000 = 1400P \implies 7000 = 1400P \implies P = 7000 / 1400 = 5$.
Answer: The General Price Level ($P$) is 5.
Cambridge economists (Alfred Marshall, A.C. Pigou, D.H. Robertson, J.M. Keynes) focused on the demand for money to hold as liquid cash balances:
Where: $M = \text{Money Supply}$, $k = \text{Fraction of real national income held in liquid cash}$, $P = \text{Price Level}$, $Y = \text{Real National Income}$.
Credit Creation and Central Banking
Commercial banks expand credit through derivative deposits. Given an initial primary deposit ($D$) and Cash Reserve Ratio ($\text{CRR}$), total credit created ($K$) is:
Step-by-Step Credit Expansion Round Table (Initial Deposit = $1,000, CRR = 10%):
| Banking Round | Primary Deposit ($) | Required Reserve (10%) ($) | Derivative Loan ($) |
|---|---|---|---|
| Bank A (Round 1) | 1,000.00 | 100.00 | 900.00 |
| Bank B (Round 2) | 900.00 | 90.00 | 810.00 |
| Bank C (Round 3) | 810.00 | 81.00 | 729.00 |
| Total System Output | $10,000.00 | $1,000.00 | $9,000.00 |
| Tool Category | Policy Instrument | Operational Mechanism |
|---|---|---|
| Quantitative (General) | Repo Rate | Short-term rate at which RBI lends money to commercial banks against government securities. |
| Quantitative (General) | Cash Reserve Ratio (CRR) | Percentage of Net Demand and Time Liabilities (NDTL) banks must park as cash with RBI. |
| Quantitative (General) | Statutory Liquidity Ratio (SLR) | Percentage of NDTL banks must maintain in liquid assets (gold, government bonds). |
| Quantitative (General) | Open Market Operations (OMO) | Sale/Purchase of government securities in open market to regulate systemic liquidity. |
| Qualitative (Selective) | Margin Requirements & Credit Rationing | Directing credit flow to specific priority sectors and setting loan-to-value caps. |