Page 147 - DECO402_Macro Economics

Macroeconomic Theory

Notes payments are done by the banks. The importance of demand or current deposits is continuously
increasing in India.
It is very safe and convenient to make the payment by the cheque from current or demand deposit
account. The payment by cheque is so convenient because however amount of cash can be withdrawn
by the cheques. The use of high value notes can be unsafe. Banks have the evidence of payments by
cheques because these are noted in the bank accounts. If there would be a problem related to payment
then it can be solved by the investigations.
Keynes has included the demand deposits in supply of money in his book “A Treatise on Money”
(1930 AD). At that time, the economists as Parker Wills had objected on it. But currently the demand
deposits are started to be include in supply of money in every country approximately because goods
and services can also be purchased by demand deposits. But this thing is remarkable that it is not
compulsory by the law to accept the payment by cheque. Any of the person can deny accepting the
cheque. But to pay in cash form is a legal obligation
Banks give the loan on the basis of money deposited to them. Fro own experiences, Banks have the
knowledge of this thing that all the depositors never withdraw their entire deposits at the same time.
So if they keep in them a definite proportion of total deposits and give the remaining amount as credit
then they can fulfill the needs of depositors. This is the reason that banks are in the situation that
however totals deposits they are having many times greater than that they can credit to people. This
activity of banks is called as ‘Credit Creation’. The credit created by banks is also included in supply
of money because it is a part of demand deposits.

Did You Know? Money supply should also include saving and term deposits besides
currency in circulation and demand deposits.

Self Assessment
Multiple Choice Questions:
3. Money should include all those things which are it’s close …………….. .
(a) substitutes (b) installation
(c) are not (d) none of these
4. The two components of money supply are—
(a)Currency and Bank Deposits (b) Wealth and assets
(c) House and Shop (d) None of these
5. The purport from currency is the coins and …………….. in circulation.
(a) wealth (b) notes
(c) rupee (d) none of these
6. ………………….. are the important part of money supply.
(a) Banks (b) Currency Notes
(c) Citizens (d) None of these

140 LOVELY PROFESSIONAL UNIVERSITY