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Financial Markets


Unit 6




Santanu Sengupta



I hear, I forget,

I see, I remember,

I DO, DO, DO,…

I UNDERSTAND!

  1. Different Monetary Systems


  2. Money demand, supply and equilibrium

  3. Monetary Policy and OMOs

  4. Monetary aggregates

  5. Money Creation & Quantitative Theory of money

  6. RBI & Monetary Policy

  7. Banking system liquidity, surplus & deficit

Money comes in 3 forms primarily –



  1. Commodity money → deriving value from intrinsic value of

the underlying commodity (e.g.: gold, silver coins, etc)


  1. Representative money → money backed by a commodity

    • No intrinsic value. Value of the commodity supports its value




    • 17th & 18th century: Corn, Tobacco, Fur used as backing. Modern eg is bitcoin

    • Precious metals like gold: Since it was backed by gold, not much

influenced by inflation

    • Govts would only be able to print as much money as the

amount of gold they held in their vaults



  1. Fiat money → backed by a Govt. Paper money / coins







  • An IOU, that everyone in the economy trusts, by virtue of it being

issued as a legal tender

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