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Money Market One Shot | CA Foundation Business Economics | Vishwas CA | Shubham Jagdish Sir πŸ”₯

VishwasCA・122 minutes read

The video discusses Chapter 8 of the CA module, covering various economic theories on money, including the Quantity Theory of Money and the Cambridge Approach. It explores the demand for money, different motives for holding cash, and the impact of inflation on the money supply.

Insights

  • Money is defined as a store of value, durable, and long-lasting, with intrinsic value exceeding its metallic worth, known as fiat money.
  • The Quantity Theory of Money (QTM) by Irving Fisher highlights the relationship between money circulation and price levels, focusing on the equation of exchange.
  • The Cash Balance Approach, also known as the Cambridge Approach, focuses on transaction and precautionary motives for holding money.
  • The decision to hold cash or invest in bonds is influenced by the relationship between interest rates, bond prices, and expected returns, with a focus on maximizing wealth and minimizing potential losses.

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Recent questions

  • What are the characteristics of money?

    Money is generally acceptable, durable, and divisible.

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Summary

00:00

Understanding Money Demand Theories in Economics

  • The video discusses Chapter 8 of the CA module, focusing on the money market unit divided into three parts: Unit One, Unit Two, and Unit Three.
  • The chapter delves into various economic theories on money, emphasizing the concepts of store of value, unit of account, and medium of exchange.
  • Money is defined as a store of value, durable, and long-lasting, with intrinsic value exceeding its metallic worth, known as fiat money.
  • The characteristics of money include being generally acceptable, difficult to counterfeit, and divisible into smaller units for ease of use.
  • Broad money measurement in an economy is typically through liquid financial assets, including national currencies and transferable deposits.
  • The demand for money arises from the need for liquidity, real balance, and command over goods and services, leading to various theories on money demand.
  • The Quantity Theory of Money (QTM) by Irving Fisher highlights the relationship between money circulation and price levels, focusing on the equation of exchange.
  • The Cambridge approach, introduced by economists like Alfred Marshall and John Maynard Keynes, offers insights into the demand for money based on transaction purposes and the volume of transactions.
  • Aggregate demand for money is influenced by the number of transactions people desire, with the total volume of transactions multiplied by the price level representing the demand for money.
  • The Cambridge approach provides a different perspective on the demand for money, emphasizing the importance of transactions and the price level in determining the need for money in an economy.

16:22

Cash Balance Approach: Motives for Holding Money

  • The Cash Balance Approach, also known as the Cambridge Approach, focuses on transaction and precautionary motives for holding money.
  • Transaction motive involves the need for cash for current transactions and business exchanges, due to a lack of synchronization between expenditure and receipt.
  • Precautionary motive entails holding money for unforeseeable future expenses, influenced by economic conditions and personal characteristics.
  • Speculative motive involves holding cash to exploit investment opportunities and take advantage of future changes in interest rates and bond prices.
  • Keynes' theory of liquidity preference emphasizes the desire to hold money for future investments and to benefit from fluctuations in interest rates and bond prices.
  • Market value of bonds and interest rates are inversely related, with a rise in interest rates leading to a decrease in bond prices and vice versa.
  • Investors compare current interest rates with normal and critical rates to determine whether to hold cash or invest in bonds based on expected returns and capital gains.
  • Wealth holders may choose to hold liquid cash over bonds if they anticipate a rise in interest rates and a fall in bond prices, to avoid potential capital losses.
  • Conversely, if current interest rates are low compared to normal rates, investors may opt to hold cash to avoid potential capital losses from falling bond prices.
  • The decision to hold cash or invest in bonds is influenced by the relationship between interest rates, bond prices, and expected returns, with a focus on maximizing wealth and minimizing potential losses.

30:45

Wealth Holder's Portfolio: Bonds, Cash, Interest

  • A typical wealth holder's asset portfolio is primarily composed of government bonds.
  • If the current interest rate is lower than the critical rate, the asset portfolio will consist mostly of cash.
  • Speculative demand for money is inversely related to the interest earned.
  • The demand for money decreases as interest rates rise.
  • Discontinuous portfolio decisions of individual investors are shown in a figure.
  • When the current interest rate is higher than the critical rate, wealth holders invest in government bonds.
  • The liquidity trap occurs when the public holds onto money due to fear of adverse events.
  • Expansionary monetary policy may not stimulate economic growth if income and interest rates do not increase.
  • Open market operations involve the buying and selling of securities by the RBI.
  • The transaction demand for money depends on the rate of interest and the cost of transferring between money and bonds.

44:49

"Money, Risk, and Investment Strategies Explored"

  • Investing money involves considering returns and risks, leading to decisions on where to invest.
  • Brokerage fees are a factor to consider, along with the cost of transaction transfers.
  • Milton Friedman's theory on the Quantity Theory of Money is discussed, focusing on the demand for money.
  • Permanent income, as emphasized by Friedman, determines the demand for money, not current income.
  • Wealth is measured by permanent income divided by the discount rate, representing total wealth.
  • Inflation affects the demand for money, with higher prices leading to increased demand.
  • James Tobin's analysis highlights individuals' behavior towards risk and their portfolio composition.
  • Tobin's Liquidity Preference Function shows the relationship between interest rates and money demand.
  • Tobin's theory on risk aversion and portfolio composition is explained, emphasizing a balanced mix of assets.
  • Aggregate Liquidity Preference Curve, based on Tobin's theory, is determined by changes in interest rates and money demand.

59:27

Differing Views on Money Demand and Supply

  • Fisher's approach and Cambridge approach differ in their views on the demand for money
  • Fisher's approach emphasizes transaction and precautionary motives for needing money
  • Cambridge approach focuses on the store of value and medium of exchange aspects of money
  • The demand for money is influenced by income elasticity and sensitivity to interest rates
  • Speculative demand for money is related to investments in bonds and shares
  • Real income and real money are determined by the price level and purchasing power
  • Precautionary money balances are held due to income elasticity and insensitivity to interest rates
  • Speculative demand for money is negatively related to interest rates
  • Keynes suggests that high current interest rates lead to expectations of future rate decreases
  • The supply of money is crucial for monetary policy and price stability
  • Money supply measurement includes various categories like m1, m2, m3, and m4, each with specific components and exclusions

01:15:22

Determining Money Supply: Central vs. Economic Influence

  • Money supply is determined by two theories: exogenously by the Central Bank and endogenously by changes in economic activities.
  • The money supply deficit is caused by people's desire to hold currency relative to deposit interest rates.
  • The practice of determining money supply is based on the money multiplier concept.
  • The money multiplier is derived from the monetary base and determines the relation between money stock and money supply.
  • The monetary base is the total currency in circulation and bank reserves.
  • The money supply is defined as currency held by the public and banks plus bank deposits.
  • The money multiplier indicates the change in the monetary base transformed into money supply.
  • Commercial banks create credit by making loans and investing excess reserves to earn interest.
  • The behavior of central banks and commercial banks influences the supply of money.
  • The currency deposit ratio affects the money multiplier, with a smaller ratio leading to a larger multiplier.

01:30:24

Government Spending Boosts Money Supply and Employment

  • Government expenditure affects money supply
  • Spending by the government increases money supply
  • Investment in infrastructure like bridges and roads boosts money supply
  • Increased money supply leads to more employment opportunities
  • Central Bank provides Way and Means Advances to State Governments
  • RBI loans to the government generate excess reserves
  • Credit Multiplier refers to the creation of additional money
  • Reserve money includes currency in circulation and bank deposits with RBI
  • Money supply depends on Central Bank decisions and commercial bank actions
  • Money supply is influenced by reserve money and the Money Multiplier

01:45:39

"Monetary Policy Framework and Organization Structure"

  • Monetary Policy Framework is to be read along with Organization Structure of Monetary in If you want to read policy decisions too then let's go Children start this monetary policy
  • Reserve Bank of India uses monetary policy to Manage Economic Fluctuation and Achieve Price stability which means that Inflation is low and stable
  • Reserve Bank of India conducts monetary policy by adjusting the supply of Money Usually Through Buying and Selling Securities in the Open Market
  • Open Market Off operations affect short term interest Rates Which In Turn Influence Anchor Term Rates and Economic Activity
  • When Central Bank Lower Interest Rates Monetary Policy Is Easy When It Raises Interest Rate monetary policy is tightening
  • Monetary policy is brought out of it There is also a method called open market operation
  • The Central Bank in its execution of monetary policy function With an articulated monetary policy Framework which has three basic components
  • The objective of monetary policy is to bring What is the purpose of analytics? Of monetary policy which focuses on the Transmission Mechanism and the Operating Procedures
  • Reserve Bank of India 1934 In its primal sets out the objective of The Bank Age Too Regulate the issue and keeping of bank notes Reserves with a View to Securing Monetary stability in India
  • The primary Objective of monetary policy has been Maintenance of judicial balance between Price and stability and economic growth Price stability within a country second Good coordination between economic growth

02:02:05

Banking Regulations and Monetary Policy Overview

  • Reserves 10 lets from own bank's lets if SLR is at Rs 20, then Rs 1000 crore is Rs 20, resulting in Rs 200 crore in your bank.
  • SLR money must be kept in liquid form, such as cash or gold, amounting to 200 crores.
  • SLR money is spent without RBI permission, and no bank can spend it.
  • CRR must be kept with RBI, while SLR is kept with your bank.
  • Inflation leads to an increase in SLR, reducing banks' available money for loans.
  • Deflation results in a decrease in SLR, allowing banks to have more money for loans.
  • Open market operations involve RBI selling securities to the public during inflation to reduce money supply.
  • Bank rate is the rate at which RBI lends to commercial banks, impacting loan costs for the public.
  • Margin requirement is increased during inflation to discourage loans and decreased during deflation to encourage borrowing.
  • Selective credit control involves limiting loans to specific industries to control credit and lending practices.

02:18:00

Understanding RBI's Policy Rate Determination

  • The fixed repo rate quoted by Sovan Securities in the Overnight Segment of LF is considered the policy rate, which is a bit tricky to understand. Reverse repo operations involve RBI borrowing money from banks by providing them with securities.
  • The Monetary Policy Committee of the Reserve Bank of India determines the policy rate through debate and majority vote by a panel of experts to achieve the inflation target, as per the amended RBI Act of 1934.
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