Business Economics: Money Market | CA Foundation Chanakya 2.0 Batch π₯
CA Wallah by PWγ»133 minutes read
The text covers essential topics in Business Economics Money Market, emphasizing the demand for money, supply of money, and monetary policy, crucial for exams and practical application. It delves into concepts like money as a medium of exchange, the Quantity Theory of Money, monetary aggregates, money multiplier approach, and monetary policy tools used by central banks worldwide to stabilize price levels and control GDP growth.
Insights
- Money serves as a medium of exchange and payment, with fiat money being government-issued and not backed by physical commodities, possessing characteristics like generality, durability, and scarcity.
- Demand for money is influenced by liquidity, wealth, and idle money returns, affecting interest rates, prices, and income levels in the economy, with higher income leading to increased money demand, especially during inflation and low interest rates.
- Theories like the Quantity Theory of Money, Keynesian Liquidity Preference Approach, and Neo-Classical theories explain money demand based on income, interest rates, and wealth, with transaction, precautionary, and speculative motives driving money demand.
- Monetary policies, including open market operations, qualitative tools, and selective credit control, aim to regulate credit flow, production, prices, and money usage to maintain economic stability, with the RBI adjusting reserve ratios and conducting market operations to control money supply and inflation.
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Recent questions
What are the characteristics of money?
Money serves as a medium of exchange and payment, with characteristics like generality, durability, cognizability, scarcity, portability, uniformity, and divisibility.
How does demand for money influence the economy?
Demand for money is driven by liquidity, wealth, and the lack of returns on idle money, influencing interest rates, prices, and income levels in the economy.
What is the Quantity Theory of Money?
The Quantity Theory of Money, proposed by Irving Fisher in 1911, states that the price level is directly proportional to the quantity of money in circulation.
How do commercial banks create credit money?
Commercial banks create credit money by lending out the money deposited by individuals, generating additional funds in the economy.
What are the key objectives of monetary policy?
The key objectives of monetary policy are to foster economic growth, maintain stability, ensure access to credit for productive sectors, and manage inflation and price stability.
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Summary
00:00
Money Market Essentials: Demand, Supply, Policy
- Chapter Number Eight of Business Economics Money market is covered in the session
- The unit is divided into three parts: demand for money, supply of money, and monetary policy
- Unit two and three are crucial for the exam, focusing on theory and practical application
- Emphasis on solving MCQs during the video by pausing and practicing
- Money is a medium of exchange and a means of payment
- Fiat money is government-issued and not backed by physical commodities
- Characteristics of money include generality, durability, cognizability, scarcity, portability, uniformity, and divisibility
- Demand for money is driven by liquidity, wealth, and the lack of returns on idle money
- Money is essential for economic agents for daily transactions and convenience
- Demand for money influences interest rates, prices, and income levels in the economy
- Higher income leads to higher expenses and increased demand for money, especially during inflation and low interest rates
16:42
"Money Demand and Interest Rates Relationship"
- Opportunity cost is the Interest Rate a Person Could Earn
- Higher interest rates lead to more temptation to invest money
- Inverse relationship between Interest Rate and Demand for Money
- Financial innovation leads to reduced need for holding cash
- Quantity Theory of Money by Irving Fisher in 1911
- Demand for money depends on income, interest rate, and wealth
- Cambridge equation for money demand: MD = P * Va
- Nominal national income calculation: P * Va
- Liquidity Preference Approach by Keynes: three motives for money demand - transaction, precautionary, speculative
35:56
Managing Cash Flow for Personal and Business Needs
- People need cash for personal and business transactions like school fees, baby clothes, electricity bills, telephone bills, ration, water, factory rent, electricity bills, raw materials, and salaries.
- There is a time gap between income receipt and expenditure, necessitating planning for expenses.
- Service provision and salary payments should be immediate to avoid inconvenience.
- Regular expenses must be managed consistently, distinguishing between personal and business needs.
- Transaction demand is directly linked to income levels and unaffected by interest rates.
- Precautionary motive involves saving for future emergencies based on income size and economic conditions.
- Precautionary demand varies with economic phases, with more savings during downturns.
- Precautionary income elasticity increases with higher income levels.
- Speculative transactions involve buying and selling bonds for capital gains based on interest rate and bond price relationships.
- Investors adjust cash and bond holdings based on current interest rates and expected returns, aiming for capital gains.
54:56
Keynesian Theory and Money Supply Analysis
- Opportunity cost means that you have to maintain the optimum cash balance and invest in bonds to minimize it.
- The main theories discussed include the theory of feeder man, pass demand for money as a behavior towards risk, inventory approach, and Neo Classical theory.
- Keynesian theory is highlighted as the most important among the theories discussed.
- Higher interest rates lead to higher opportunity costs, impacting the demand for money and investment decisions.
- The Cambridge approach is identified as the neo-classical approach in monetary theory.
- Real money is not affected by inflation, while nominal money is inflation-adjusted.
- Precautionary balance refers to the money people want to hold for unforeseen circumstances, influenced by the rate of interest.
- Speculative demand for money is inversely related to interest rates, affecting investment decisions.
- The concept of stock and flow in money supply is crucial for understanding the total amount of money in circulation and its changes over time.
- Money supply analysis is essential for macroeconomic stability, monetary policy formulation, and understanding the causes of money growth.
01:14:58
"Money Supply and Price Stability in Economy"
- Money supply is crucial for maintaining price stability in the economy.
- Monetary policies are utilized to address deviations from price stability standards.
- Central banks worldwide adopt monetary policies to stabilize price levels and control GDP growth.
- Money supply control is essential for achieving economic stability.
- Money in the economy comes from two sources: high powered money (fiat money) issued by the Central Bank and credit money generated by commercial banks.
- Credit money is created when commercial banks lend out the money deposited by individuals.
- The spread refers to the difference between the interest paid by the bank and the interest earned on loans.
- Monetary aggregates, such as M1, M2, M3, and M4, are used to measure money supply, excluding National Savings Certificates from M4.
- The behavior of the Central Bank and the public collectively determines the money supply, known as the money multiplier approach.
- The money multiplier approach indicates how much money supply can be created based on the introduction of currency by the Central Bank and subsequent banking activities.
01:36:28
Banking Regulations and Reserve Requirements Explained
- Banks do not take the full loan of Rs 5000 crore.
- Banks must maintain the Cash Reserve Ratio (CRR) with the Reserve Bank of India.
- The Statutory Liquidity Ratio (SLR) must also be maintained by banks.
- Banks must invest in liquid assets like gold and government securities to meet SLR requirements.
- If the CRR is at 5 and the amount is Rs 5000 crores, the bank will get Rs 250 crore.
- If the SLR is 15, investments in securities worth Rs 750 crores are required.
- The money under SLR cannot be distributed as a loan.
- The credit money a bank creates depends on its reserve ratios.
- The money multiplier formula is 1 divided by the required reserves.
- The credit multiplier formula is 1 divided by the total reserves maintained by the bank.
01:57:28
"Bank Reserves and Money Multiplier Explained"
- C deposited Rs 900 in Axis Bank at Rs 10, creating reserves and giving Rs 810 to S.A. D for a loan to D.
- D agreed to loan to E, who further paid E the money deposited in the bank.
- If in ICICI Bank, Rs 810 will be deposited, creating reserves and giving a loan of βΉ29 to F.
- The money will move from one bank to another, creating a credit multiplier effect.
- The concept of credit multiplier is explained, with a focus on currency to deposit ratio and reserve requirements.
- The government may resort to short-term borrowing from RBI if cash balance is low.
- Payments under government control are managed through RBI, affecting government accounts and bank transactions.
- Access reserves are created when banks do not withdraw money from RBI, impacting money supply.
- The money multiplier is determined by currency ratio, reserve requirements, and access reserves.
- Commercial banks adjust access reserves to impact the money multiplier and money supply, influencing economic stability.
02:16:48
"Monetary Policy Impact on Economy and Stability"
- Monetary policy changes impact the economy's growth and price stability.
- Understanding transmission and how monetary policy changes affect the economy is crucial.
- The objective of monetary policy is to foster economic growth and maintain stability.
- Monetary policy aims to ensure easy access to credit for productive sectors.
- Sustaining moderate interest rates encourages investment and economic growth.
- Efficient market operations for government securities are vital for stability.
- Monetary policy focuses on managing inflation and controlling price stability.
- Transmission of monetary policy involves changes in interest rates and their impact on economic activity.
- The saving and investment channel is influenced by changes in interest rates.
- The cash flow channel is affected by changes in lending rates, impacting cash outflow and spending patterns.
02:35:46
Impact of Interest Rates on Wealth and Economy
- Lower interest rates lead to increased interest income and reduced expenses.
- Cheap bank loans encourage asset creation and ownership.
- Mortgaging assets allows for higher loan amounts.
- Lower interest rates support asset prices and increase demand.
- Selling assets can be a way to increase wealth.
- Monetary policy impacts savings, investment, cash flow, asset prices, and wealth.
- Reduced interest rates by the Reserve Bank of India attract foreign investment.
- Currency depreciation due to foreign funds withdrawal affects exports and imports.
- Reserve ratios like CRR and SLR regulate bank liquidity and lending capacity.
- Adjusting these ratios can control money supply and inflation.
02:56:59
Reserve Bank of India's Monetary Policy Operations
- Open market operations are conducted by the Reserve Bank of India, involving the buying and selling of government securities.
- Inflation control involves selling government securities to reduce money supply and purchasing power, leading to decreased demand.
- To combat recession, the RBI increases money supply by buying government securities, boosting investor purchasing power and demand.
- Qualitative tools like margin requirements are used to control inflation by limiting the amount of loans banks can give based on asset value.
- Moral suasion encourages banks to invest in government securities rather than riskier sectors like stocks or real estate.
- Selective credit control dictates which industries banks can lend to, aiming to regulate credit flow and prevent speculative business practices.
- The Market Stabilization Scheme involves bank rates, repo rates, and reverse repo rates to manage liquidity in the economy.
- The reverse repo rate is the interest rate at which banks lend money to the RBI, with the current rate at 3.35%.
- The Marginal Standing Facility is a penal rate charged by the RBI when banks exceed their short-term loan limits.
- Monetary policy aims to regulate credit, production, prices, and money usage to maintain economic stability and growth.
03:17:31
"Take care until next video, good luck!"
- Reminder to take care until the next video
- Wishing the viewer good luck and a nice day
