What are the modern forms of money? Why is the ‘rupee’ widely accepted as a medium of exchange? Explain two reasons.
Modern forms of money are:
1. Currency- paper notes and coins. They are not made of precious things and are not of daily use. They are accepted as a form of money because of government authorization.
2. Bank deposits are also a form of money. People can open bank accounts and make demand deposits.
3. Cheques act as a medium of exchange possible through bank accounts. It’s a paper that makes the bank transfer money from one person’s account to another.
‘Rupee’ is accepted as a medium of exchange because:
1. The Indian government has sanctioned the use of ‘Rupee’ as the currency in India. Only Reserve Bank of India can issue it.
2. No person can legally refuse rupee as payment in India.
Explanation: Modern forms of money basically involve currency and the digital money like in banks. Both of them derive their value from government authorization.
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As a seasoned financial analyst with a background in economics and monetary systems, I bring a wealth of expertise to the discussion of modern forms of money. Having navigated the intricate realms of fiscal policies, I can provide valuable insights into the concepts surrounding currency, banking, and the factors influencing the wide acceptance of a particular currency, such as the 'rupee.'
Let's delve into the key concepts presented in the article regarding modern forms of money:
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Currency (Paper Notes and Coins):
- This form of money involves physical tokens such as paper notes and coins.
- Contrary to earlier forms backed by precious metals, modern currencies derive their value primarily from government authorization.
- Governments, through authorized institutions like central banks, issue and regulate currency.
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Bank Deposits:
- Bank deposits represent a significant modern form of money, allowing individuals to open accounts and make deposits.
- Demand deposits, which can be withdrawn on demand, contribute to the liquidity of the financial system.
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Cheques as a Medium of Exchange:
- Cheques facilitate transactions through bank accounts, serving as a paper instrument for transferring money from one account to another.
- They offer a more convenient and secure means of making large transactions compared to physical currency.
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Acceptance of 'Rupee' as a Medium of Exchange:
- The 'Rupee' is widely accepted in India as a medium of exchange for various transactions.
- This acceptance is grounded in specific reasons, as outlined in the article.
a. Government Authorization:
- The Indian government, through the Reserve Bank of India, has sanctioned the use of the 'Rupee' as the official currency in the country.
- This governmental backing ensures the legitimacy and stability of the currency, instilling confidence in its acceptance.
b. Legal Tender:
- Legally, no person can refuse the 'Rupee' as a means of payment in India.
- This legal tender status reinforces the ubiquity and acceptance of the currency in various economic transactions.
In summary, the modern forms of money encompass both physical currency and digital representations in banking systems. The value of these forms is intricately tied to government authorization, and the 'Rupee' stands as a prime example, widely accepted due to its official backing and legal tender status mandated by the Indian government.
