Economics Notes: Inflation, Deflation, Money, Banks &
Financial Markets
Inflation and Deflation
Inflation: A persistent rise in the general price level of goods and services in an economy over
time.
Effect: Reduces purchasing power; money buys fewer goods.
Example: If milk price rises from ■50 to ■60 per liter, it is inflation.
Deflation: A fall in the general price level of goods and services.
Effect: Increases purchasing power; money buys more.
Example: If wheat price falls from ■40/kg to ■30/kg, it is deflation.
Definition of Money
Money is anything widely accepted as:
1. A medium of exchange for goods and services.
2. A unit of account to measure value.
3. A store of value for saving and future use.
Evolution of Money
1. Barter System: Direct exchange of goods (problem of double coincidence of wants).
2. Commodity Money: Commodities like gold, salt used.
3. Metallic Money: Coins of gold, silver, copper.
4. Paper Money: Currency notes.
5. Credit Money: Cheques, drafts.
6. Digital Money: Online transfers, UPI, cryptocurrency.
Features of Money
1. General Acceptability
2. Voluntary Acceptance
3. Medium of Exchange
4. Measure of Value
5. Final Payment of Loans
6. Store of Value
7. Transfer of Value
Functions of Money
Primary Functions:
- Medium of Exchange
- Measure of Value
Secondary Functions:
- Standard of Deferred Payments
- Store of Value
- Transfer of Value
Other Functions:
- Basis of Credit
- Distribution of Income
- Promotes Economic Development
Importance of Money
1. Solves barter problems.
2. Helps in capital formation.
3. Encourages savings.
4. Facilitates trade and industry.
5. Improves standard of living.
Banks in India
1. Accept deposits (savings, current, fixed).
2. Provide loans (personal, business, housing).
3. Facilitate payments (cheques, drafts, online transfers).
4. Promote savings and investments.
5. Support economic development.
Financial Market
Meaning: Place for buyers and sellers of financial assets.
Types:
- Money Market: Short-term funds (e.g., treasury bills).
- Capital Market: Long-term funds (e.g., shares, bonds).
Functions:
- Mobilizes savings
- Allocates funds to productive uses
- Provides liquidity
- Determines prices of securities
- Reduces transaction costs
Importance: Helps investment, provides capital, ensures stability.