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Deposits in the bank account can be withdrawn on demand, and therefore are called demand deposits.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