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Money Market | Marathon Part 1 | CA Foundation June 2024 | CA Mohnish Vora

Ultimate CA・91 minutes read

The CA Foundation June Marathon Session 2024 covers the Money Market chapter in three units, discussing money definition, characteristics, demand theories, and more. Various theories like the Cambridge approach, Fisher's formula, and liquidity preference theory explain money demand and investment choices, emphasizing the impact of interest rates and bond prices on financial decisions.

Insights

  • Money serves as a vital medium of exchange, store of value, and unit of value in the economy, with its characteristics and functions crucial for economic transactions and stability.
  • Understanding the intricacies of money demand and the factors influencing it, such as interest rates, income levels, and market conditions, is essential for financial decision-making and economic policy formulation.

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Recent questions

  • What is the definition of money?

    Money is a store of value, medium of exchange.

  • What factors influence money demand?

    Money demand is influenced by interest rates, income.

  • What are the functions of money?

    Money functions as a medium of exchange, store of value.

  • What is the relationship between interest rates and money demand?

    Money demand is inversely related to interest rates.

  • How does money supply affect economic activity?

    Money supply variations impact aggregate economic activity.

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Summary

00:00

CA Foundation June Marathon: Money Market Essentials

  • The session is the CA Foundation June Marathon Session 2024 for the new syllabus exams.
  • The instructor is Munish Ra, a Chartered Accountant teaching Business Economics, Financial Management, and Strategic Management.
  • The session covers the Money Market chapter divided into three units: Money Demand and Theory, Money Supply, and Monetary Policy.
  • There is no direct link between the Money Market chapter and any other chapter.
  • Money is defined as a store of value, easily translated into prices, and widely accepted as a medium of exchange.
  • Token money has no intrinsic value but is accepted as a means of payment due to government backing.
  • Money's variation in stock affects the aggregate economic activity of the economy.
  • Money is considered a liquid liability of the RBI and is promised to the bearer by the Governor.
  • Characteristics of money include being generally accepted, durable, effortlessly recognizable, and difficult to counterfeit.
  • Money should be easily convertible into prices and widely accepted in transactions.

13:24

"Money: Functions, Demand, and Theories Explained"

  • Relatively scarce means as much as needed; excess money supply leads to inflation.
  • Money should be portable and easily transported, uniform in color, and divisible into smaller parts.
  • Different denominations of currency have distinct colors, aiding in easy identification.
  • Money serves as a medium of exchange but is not equivalent to a bill of exchange.
  • Functions of money include being a convenient means of transaction, a unit of value, and a standard of deferred payment.
  • Money acts as a store of value, retaining its worth over time.
  • Demand for money is influenced by interest rates and the opportunity cost of holding money.
  • Money demand is directly proportional to the price level and income, but innovation in banking services can reduce it.
  • Various theories, including the classical approach, Cambridge economists' theories, and Keynesian theory, explain money demand calculation.
  • Arvin Fisher's formula for money demand considers money in circulation, velocity, average price level, and number of transactions.

27:14

"Money Velocity Determines Money Supply Demand"

  • RBI printed ₹1 and injected it into the economy
  • Mr. A received the ₹1 and used it for expenses
  • Mr. A then passed on the ₹1 to Mr. B
  • Mr. B used the money for his benefit or services
  • Mr. C received the money from Mr. B and passed it on to Mr. D
  • The money changed hands four times in total
  • Velocity of Money is the number of times money changes hands
  • Money supply in the country is determined by the demand for money
  • Cambridge approach focuses on money demand for transactions and uncertainty
  • Money demand formula: Money Demand = K * P * Y

41:26

Money Demand Theories: Cambridge vs. Fisher

  • Money demand is discussed in relation to Cambridge and Fisher's theories.
  • Fisher explains that money is needed for transactions only, focusing on the quantity theory of money.
  • Cambridge introduces the balance approach, emphasizing the need for money for transactions and precautionary measures.
  • Liquidity preference theory highlights the need for money for transactions, precautions, and speculative purposes.
  • Precautionary motive for holding money is explained as a measure against unforeseen future expenses.
  • Precautionary demand for money is income elastic and interest elastic, varying with income levels and market interest rates.
  • Speculative motive involves holding money for attractive investment opportunities, inversely related to interest rates.
  • Speculative demand for money is discussed in relation to bond prices and interest rate changes.
  • Holding money provides zero returns, while investing in bonds offers returns in the form of interest and capital gains.
  • Understanding the relationship between interest rates, bond prices, and returns on money is crucial for financial decision-making.

58:05

Maximizing Bond Returns Through Interest Rates

  • If the price of a bond reaches 00, one must wait until the end of the year.
  • Bonds offer two types of gains: interest and capital returns.
  • Keeping cash in money form yields no returns.
  • Market rate of interest is crucial, always aim for it.
  • If interest rates increase, bond prices will decrease.
  • When interest rates fall, convert bonds to cash.
  • Speculative demand for money increases as interest rates decrease.
  • Investing in bonds with higher interest rates reduces speculative demand for money.
  • Speculative demand for money can be reduced to zero by investing in bonds with the highest interest rates.
  • Interest rates can reach a point where they cannot decrease further, similar to some people's behavior.

01:12:38

"Monetary Policy, Bunds, and Liquidity Trap"

  • Returns around Rs 3 indicate being in the bundle
  • Interest will not fall below the lowest possible rate touched
  • Rates have fallen to a level where they cannot decrease further
  • If rates increase in the future, bund prices will not fall
  • RBI's monetary policy aims to encourage bund purchases
  • Despite increased money supply, people are not buying bunds
  • Liquidity trap hinders the effectiveness of monetary policy
  • Global Financial Crisis 2008 exemplifies a liquidity trap
  • Inventory approach determines optimal cash and bond balance
  • Money demand is influenced by income, asset returns, and asset prices

01:30:35

Factors Influencing Money Demand: Wealth, Price, Inflation

  • Minimum income required is Rs 10 per month to earn a permanent income of Rs 15000 annually.
  • Permanent income is the consistent income earned annually from the minimum required.
  • Money demand depends on total wealth, price level, opportunity cost, and inflation.
  • Total wealth, price level, opportunity cost, and inflation determine money demand.
  • Milton Friedman stated that money demand is influenced by total wealth, price level, opportunity cost, and inflation.
  • Money demand increases with total wealth, indicating a positive relationship.
  • Price level affects money demand positively, with higher prices leading to increased spending.
  • Opportunity cost impacts money demand inversely, decreasing when money holding declines.
  • Inflation reduces the real value of money, positively affecting money demand.
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