Contents

      Preface                                                                                                                                    (v)

1.   Money: Definitions and Functions                                                                                1-24

1.1   Basic Economy                                                                                                                      2

1.2   Money                                                                                                                                   4

1.3   Functions of Money                                                                                                                5

1.4   Origin and Development of Money                                                                                        10

1.5   Classification of Money                                                                                                         15

1.6   Qualities of Good Money                                                                                                       18

1.7   Defects of Money                                                                                                                  19

1.8   Importance of Money                                                                                                            20

1.9   Conclusion                                                                                                                           22

2.   Quantity Theory of Money                                                                                            25-46

2.1   Money and Price Level (Cash Transaction Approach)                                                             27

2.2   Fisher’s Equation of Exchange                                                                                              28

2.3   Cambridge Cash Balances Approach                                                                                     35

2.4   Evaluation of Cash Balances Approach                                                                                  39

2.5   Keynes’ Fundamental Equations                                                                                          41

2.6   Friedman's Quantity Theory of Money                                                                                  43

3.   Demand for Money and Supply of Money                                                                   47-72

3.1   Classical and Keynesian Models of Demand for Money                                                           47

3.2   Money Supply and its Components                                                                                        62

3.3   Concepts of Money Supply                                                                                                    64

3.4   Measures of Money Supply                                                                                                   65

3.5   High Powered Money Theory of Money Supply                                                                      66

3.6   Determinants of Money Supply                                                                                             68

3.7   Money and Rate of Interest                                                                                                   70

4.   Creation of Deposit Money                                                                                            73-90

4.1   Credit Creation                                                                                                                    74

4.2   Bank Credit Creation Process                                                                                               74

4.3   Credit Contraction                                                                                                               84

4.4   Competitive Banking and Credit Expansion                                                                          86

4.5   Limitations on Credit Creation                                                                                             87

5.   Commercial Banking                                                                                                    91-120

5.1   Origin of Banking                                                                                                                92

5.2   Commercial Banks                                                                                                               93

5.3   Commercial Banks and Other Financial Institutions                                                             94

5.4   Functions of Commercial Banks                                                                                           94

5.5   Principles of Commercial Banking                                                                                        99

5.6   Balance Sheet of a Commercial Bank                                                                                  102

5.7   Specialised Banks                                                                                                               113

6.   Central Banking                                                                                                          121-132

6.1   Evolution of Central Banking                                                                                              121

6.2   Definitions of Central Bank                                                                                                123

6.3   Comparison between Central Bank and a Commercial Bank                                                124

6.4   Functions of Central Bank                                                                                                  125

6.5   Central Bank in an Underdeveloped or a Developing Economy                                             131

7.   Reserve Bank of India                                                                                                 133-144

7.1   Function of Reserve Bank of India                                                                                       134

7.2   Monetary Functions                                                                                                           134

7.3   Non-Monetary Functions                                                                                                    140

8.   Monetary Policy                                                                                                          145-164

8.1   Monetary Policy                                                                                                                 146

8.2   Transmission Mechanism                                                                                                   150

8.3   Demand Shocks and Supply Shocks                                                                                    152

8.4   Monetary Policy of R.B.I.                                                                                                    153

8.5   Evaluation of Monetary Policy in India                                                                                161

8.6   Conclusion                                                                                                                         163

9.   Inflation and Deflation                                                                                               165-196

9.1   Theory of Inflation                                                                                                              166

9.2   Types of Inflation                                                                                                               168

9.3   Causes of Inflation in India                                                                                                 175

9.4   Effects of Inflation                                                                                                              179

9.5   Techniques and Control of Inflation                                                                                     184

9.6   Deflation                                                                                                                            190

9.7   Inflation and Deflation—A Comparison                                                                               194

10. Classical International Trade
Theory under Constant Costs                                                                                   197-226

10.1 Introduction                                                                                                                       197

10.2 Difference between Domestic and International Trade                                                          198

10.3 Mercantilism on International Trade                                                                                  199

10.4 Production Possibility Curve with Constant
Opportunity Cost and Relative Price Basis                                                                          208

10.5 Gains from Trade under Constant Costs (Revisited)                                                             212

10.6 Terms of Trade                                                                                                                  213

10.7 Solved Problems                                                                                                                 216

11. Balance of Payments                                                                                                  227-246

11.1 Balance of Payments                                                                                                          228

11.2 Balance of Payments Accounts                                                                                            228

11.3 Balance in Two Accounts                                                                                                    234

11.4 Disequilibrium in Balance of Trade and  Payments                                                             234

11.5 International Monetary Fund                                                                                             240