Question

Answer the following question.
Define money. Lists its components.

Answer 1

Money is the usually accepted medium of exchange through which the value of goods and services is measured in a common unit. The stock of money has the following two major components.

Currency Component

The currency notes and coins as issued by the Monetary Authority are collectively called the Currency Component of the money supply. In India, RBI issues the currency notes of various denominations (such as Rs 2, Rs 5, Rs 10, Rs 50, Rs 100, Rs 500, Rs 1000). On the other hand, the Government of India issues currency coins and notes of a denomination less than and equal to Re 1. These currency notes and coins issued by the RBI and GOI are collectively called the Fiat Money or the Legal Tender Money. 

Fiat Money implies that the currency notes and coins do not have any intrinsic value. In other words, the real value of the paper (in case of currency notes) and metals (in case of coins) is not equivalent to the face value printed on the notes and coins. Fiat money derives its value only because of government order (fiat).  

The currency issued by the Monetary Authority is also known as Legal Tender Money. It implies that the values of such currency notes and coins are backed by the Monetary Authority. The Monetary Authority provides a person with purchasing power equal to the face value of the currency held by him. The fiat money becomes the legal tender when it is backed by the Monetary Authority. Moreover, the currency notes and coins issued by the Monetary Authority cannot be refused by any citizen of that country for the settlement of transactions. Therefore, it becomes the legally medium of payment in the economy. 

Deposit Component

Apart from the currency notes and coins, the stock of money also includes the Saving Deposits and the Current Account Deposits held by the public in various commercial banks.

Deposits held by the public can be classified into two major categories- Term Deposits and Demand Deposits.

1. Term Deposits- These are also known as Time Deposits. These refer to the money deposits that are held for a specific (fixed) time period say, 5 years, 10 years. Such deposits cannot be withdrawn before the maturity of the specified time period for which they are held. Also, these are non-chequeable deposits i.e. no cheques can be issued against the Term Deposits.
2. Demand Deposits- As opposed to the Term Deposits, the Demand Deposits are the deposits that are payable on-demand or on call. In other words, such deposits can be withdrawn by the depositor as and when required. Since demand deposits are always available on-demand, they are chequeable deposits i.e. cheques can be issued against such deposits.