Relevant: Prelims: Economy: Indian Banking System
- Actual money: Money which actually circulates in the economy in terms of which all payments are made and general purchasing power is held as a medium of exchange.
- Metallic Money: It’s made of metal such as gold and silver. Coins of all denomination circulating in economy are examples of metallic money. Metallic money is classified into two categories:
Full bodied money: If the face value of money is equal to its value as a commodity, it is called full bodied money. If a gold coin of face value Rs. 100/- contains gold worth of Rs. 100/- it will be called full bodied money or sometimes standard money
Token Money: If the face value of money is more than its value as commodity or intrinsic value it is known as token money.
- Paper Money: Money made of paper is called paper money. It includes different denomination. Paper money is further classified into following forms.
Representative Paper Money: If paper is issued by keeping hundred percent gold reserve of full bodied coins or gold bullion, it will be called representative money.
Convertible Paper Money: If paper money can be converted into gold coins or gold bullion on demand it is referred to as convertible money. This type of money is issued by keeping metallic reserve of equal amount behind it.
Fiat or In-convertible Paper Money: which cannot be converted into full bodied coins or gold bullion on demand. It is usually issued without keeping metallic reserve behind it.
4. Legal Tender Money: Money which has a legal approval behind it and people are bound by law to accept it in all payments. Nobody can refuse to accept it. Legal Tender Money can be classified into:
Limited Legal Tender: which can be given in payments only upto a certain limit. The payee can refuse to accept it beyond that limit. In many Asians countries 25 paisa coin and coins of low denominations are limited legal tender. The Coins in India are also considered as Limited Legal Tender. These coins can be given as payments up to 1000 rupees only.
Unlimited Legal Tender: Unlimited legal tender means that money which can be given in payments up to any limit.
- Hot Money: Money that moves regularly and quickly between financial markets so that investors could ensure they are getting the highest short-term interest rates available. Hot money continuously shifts from countries with low interest rates to those with higher interest rates affecting the exchange rate (if there is a high sum) and also has the potentiality to impact a country’s balance of payments. The Foreign portfolio investment can be considered as “Hot Money”
- Commodity Money: Its value is derived from the commodity out of which it is made. The commodity itself represents money, and the money is the commodity. For instance, commodities that have been used as a medium of exchange include gold, silver, copper, salt, peppercorns, rice, large stones etc.
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