Question

notes on money and credit

Answer 1

Money is a means by which we can get something in exchange. Initially, coins came into use. The coins were initially made of precious metals; like gold and silver. When the precious metals became too precious, ordinary metals were being used for making coins. Paper money or currency notes gradually took place of coins; although coins of smaller denominations are still in use.

The currency notes and coins are issued by the government of an authorized body. In India, the RBI (Reserve Bank of India) issues currency notes. On the Indian currency note, you can find a statement which promises to pay the bearer the amount which is mentioned on the currency note.

Advantages of Money:

Removes the coincidence of wants.Takes less storage space and is easier to carry.Liquidity of currency is easier.Now-a-days; many instruments are available through which it is not necessary to physically carry the currency.

Other Forms of Money

Deposits with Banks: Most of the people need only some currency for their daily needs. Rest of the amount is usually kept as deposit in banks. Money which is kept in a bank is safe and it even earns an interest. One can withdraw money from his account as and when required. Since deposit in the bank account can be withdrawn on demand, these deposits are called demand deposits.

One can use a cheque; instead of cash to settle payments. Moreover, one can also buy a demand draft from a bank to make payments.

Credit: Banks keep a small proportion of their deposits as cash with themselves. This is usually 15% of their deposits as cash. This amount is kept as provision to pay the depositors who may come to withdraw the money on any day. This amount is enough because only a small fraction of people come to withdraw money on a given day. The rest of the amount is used by the banks to give money on credit to people who need the credit. A bank charges interest on the loan which it gives to its creditors. The interest rate charged by a bank no loans is higher than the interest rate given by it on deposits. Thus, interest is the main source of income for banks.

Credit/Debit Cards: Now-a-days, credit/debit cards are in vogue. A debit card allows you to make payments from the amount which is lying in your bank account. A credit card, on the other hand, provides money on credit. Payment through credit/debit card is done electronically and this removes the need of carrying cash.