All About Money and Credit

How many things can you buy if you were given only 10 rupees? Can you buy a dress for that money? If not, how much money would you require? Why do we use cards instead of money? What are credits? Let us know all about money and credit below.

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Introduction

Economics is the study of the circulation of money in the market. In order to understand economics properly, we first need to understand the terms of the subject. Money and credit are two of the most commonly used terms in economics and are quite literally the basis of the entire study.

What is Money?

We all know money as the paper notes that we use to buy goods and services. But money is much more than that. It is a form of currency that is used in our day to day monetary transactions. Money need not necessarily be in terms of paper notes. There are several forms of money available today. Such as plastic money which is in forms of Debit and Credit Cards.

Digital Money which is in form of the amount you may carry in your e-wallet. With the augment of technology, the nature of money has also drastically changed. Initially, we used coins and paper notes to purchase goods and services. Although this form of currency is still available and sufficiently circulated in the market. The market has seen a steady rise in other forms of payments.

Function of Money

Basically, the use of money, in any form is to make and receive payments in return for goods or services. Traditionally RBI issues the currency notes which can be used to make monetary transactions. But of late, several new modes of payment have also entered the market.

In order for a currency or a means of payment to be an authorized means, it requires the authorization from the Reserve Bank of India. Therefore, only those means of making and receiving payments that have the authorization of RBI will be considered valid means of payments. Whether it is the paper money or digital money.

Forms of Money

As already mentioned, money comes in several forms, not just the paper currency. Let us find out what are the different forms in which money circulates in the market.

Bank Deposits

We do not use all the money that we earn. Bank deposits are one of the most common forms of money, as they are the means by which people save their money. It is always encouraged to deposit money in the bank, as that way the money does not remain stagnant and keeps circulating in the market and the depositor can earn a certain amount of interest. These deposits are also called demand deposits as they are withdraw-able on demand.

Cheque

A cheque is another form of money. At times we do not have cash in our hands, or the transaction is of a hefty sum that cannot be given in cash money, in that situation, a person can write a cheque in the name of the bearer. The bearer can present the cheque to the concerned bank and get the money either in cash or have it deposited in his or her bank account. This form of money is attached to your bank deposits. You must have a bank account before you can use a cheque.

Credit

Credit is a means of lending. People often need money to start a business or pay for college fees and other such huge expenses, which may not be possible to meet in cash and in one go. For such situations there are credits. In credit, you borrow money from the bank to meet your expenses, whether to pay off a college fee, or to pay the vendors for any business supply, or to purchase a new house, or car.

Basically, anything that requires a huge sum of money. Thus, credit is an important part of monetary circulation in the market. It is this money that generates more money for the bank, which bank can again put into circulation, thereby raising the GDP of the country.

How does the bank give credit?

As per RBI guidelines, banks are expected to keep few cash deposits with themselves. This is normally 15% of the total cash deposit. It is called cash reserve ratio. Banks circulate the money deposited by customers in the banks by lending it out to businesses at a rate of interest as a credit, which then acts as the income of the bank.

At times it may happen that a certain depositor comes to withdraw money but their money is in circulation. During such times bank pays the depositor out of their reserve deposits. The money in circulation is called as the credit money. It is payable by the debtor after a certain fixed period of time, often with a certain amount of interest.

Credit Cards

Another form of money is credit cards. They are used by people to make huge sums of payments for goods and services where they do not have sufficient cash. These payments are done electronically and are a kind of loan to the person who availed the credit facility. Most people prefer using cards as it eliminates the need for carrying cash.

In both the cases, money and credit are circulated in the market generating more money and assisting in development. Therefore it is important to understand the concept of money and credit. It is this money and credit that helps us in improving our economy further.

Solved Question For You

Q. RBI released Rs 1000 currency note in _____.

a. June 2000             b. October 2000

c. May 2005              d. June 1998

Ans: b. October 2000

• 1000 rupee note was first introduced in 1954 by the RBI.
• It was discontinued in 1978.
• Later, 1000 rupee notes were reintroduced in 2000.