Banky’s Understanding: Money performs 4 functions: (1) Medium of Exchange — goods are priced in money and exchanged using money. (2) Measure of Value — money measures and records the value of goods/services. (3) Store of Value over Time — money can be held and used for future payments. (4) Standard for Deferred Payments — money is the agreed measure for future receipts/payments in contracts (like your EMI!).

Banky’s Understanding: M1 = Currency with public + Demand deposits with banks + ‘Other’ deposits with RBI. This is the most liquid form of money — can be spent IMMEDIATELY. Currency = notes & coins in public’s hands (not bank’s cash). Demand deposits = current accounts, demand portion of savings accounts — payable ON DEMAND. M1 is called ‘Narrow Money’ because it includes only the most liquid components.

Banky’s Understanding: M3 = M1 + Time deposits with banking system. Time deposits = FDs, recurring deposits, cash certificates — payable NOT on demand (you wait for maturity). M3 is called ‘Broad Money’ because it includes BOTH liquid money (M1) AND locked money (time deposits). RBI publishes M3 data fortnightly and watches it closely. M3 growth rate affects price levels, exchange rates, business cycles, and GDP growth.

Banky’s Understanding: M0 = Currency in circulation + Bankers’ deposits with RBI + ‘Other’ deposits with RBI. Also called ‘base money’ or ‘high-powered money.’ This is the money RBI DIRECTLY creates. Through the banking system’s lending process, this base money gets multiplied into broad money (M3). The ratio M3/M0 = money multiplier.

Banky’s Understanding: Money Multiplier = Broad Money (M3) / Reserve Money (M0). Pronounced by Milton Friedman and Anna Schwartz (1963). Explains how base money created by RBI multiplies in the banking system. Depends on 3 factors: (1) Currency-to-deposit ratio (public behaviour), (2) Required reserves to deposits (RBI’s CRR policy), (3) Excess reserves kept by banks with RBI. Higher CRR = lower multiplier = less money creation.

Banky’s Understanding: Velocity = Nominal GDP / Broad Money (M3). Measures the frequency with which one unit of currency is used for domestically produced goods and services. High velocity = money circulates fast (healthy economy). Low velocity = money sits idle (sluggish economy). Velocity is the link between broad money and nominal GDP. Different from money multiplier which links base money to broad money.

Banky’s Understanding: A rise in general prices caused by increasing aggregate demand for goods and services. When people have more money (say, government gives stimulus cheques), they want to buy more. But if supply doesn’t increase equally, prices rise. Think of a crowded train — more passengers (demand) than seats (supply) = everyone pushes (prices rise). RBI fights demand-pull inflation by raising interest rates (reduces borrowing, reduces demand).

Banky’s Understanding: Inflation caused by substantial increase in production costs where no suitable alternative is available. Example: if crude oil prices rise, EVERYTHING that uses oil (transport, manufacturing, plastics) becomes expensive. Producers either reduce output (shortage → prices rise) or pass costs to consumers (higher prices). Unlike demand-pull, cost-push inflation is harder to control because the problem is on the SUPPLY side.

Banky’s Understanding: WPI (Wholesale Price Index): measures price changes at WHOLESALE level — what traders pay. Used for policy formulation in India (new base year migration to 2017-18). CPI (Consumer Price Index): measures price changes at RETAIL level — what consumers actually pay. Both released monthly. GDP Deflator: most comprehensive — covers ALL goods/services in the economy (not just a basket). Formula: (Nominal GDP / Real GDP) × 100. Available only quarterly (with GDP data).