Money as a medium of exchange

• A person holding money can easily exchange it for any commodity or service that he or she desires.

• Money acts as an intermediary for the goods and sevices in an exchange .

• Therefore, every one prefers to receive payments in money .

The barter system

• In a barter system goods are directly exchanged without the use money.

• Barter system was a system of exchange that was prevalent before the use of money .

• Barter system has many problems such as double coincidence of wants, which means what a person desires to sell is exactly what the other wishes to buy.

• There may be many people wanting and many possessing those goods wanted, but to allow of an act of barter system there must be a double coincident of wants.

Importance of money

• Money has solved the problems associated with the barter system.

• In an economy where money is in use , money by providing the crucial intermediate step eliminates the need for double coincidence of wants.

• Exchange becomes convenient and simple by using money.

• It saves lots of time as well as labour.

Modern forms of money

Currency :

• Includes paper notes and coins

• Not made of precious metal such as gold,silver and copper

• Unlike grains and cattle, they are not of everyday use.

• The modern currency is without any use of its own.

• It is accepted as a medium of exchange because the currency is authorised by the government of country.

• In India the Reserve Bank of India issues currency notes on behalf of central government.

• As per Indian law no other individual or organisation is allowed to issue currency.

• Rupee is widely accepted as a medium of exchange because in India law legalises the use of rupee as a medium of exchange.

Deposits with Banks:

• Banks accept the deposits and also pay an interest on the deposits.

• People's money is safe in the bank

• Deposits in the bank account can be withdrawn on demand, and therefore are called demand deposits.

• A cheque is a paper instructing the bank to pay a specific amount from the person's account to the person i whose name the cheque has been issued.

• By using cheque facility , payments can be done without using cash.