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Monetary Policy & Central Banking
How central banks like the RBI, Fed, and ECB control money supply, set interest rates, and manage inflation.
intermediate2.5 hours5 modules
Module 1 of 5 · 15 min read
What is Money?
Functions of money, money supply, and how money is created.
Money is so fundamental to modern life that we rarely think about what it actually is. But understanding money is essential to understanding economics.
The Three Functions of Money
- Medium of exchange — Money eliminates the need for barter. Instead of finding someone who has what you want AND wants what you have, you just use money.
- Store of value — Money lets you save purchasing power for the future. You can earn today and spend next month.
- Unit of account — Money provides a common measure for comparing values. Is a phone worth more than a bicycle? Money gives the answer.
A Brief History of Money
- Commodity money — Gold, silver, shells. Had intrinsic value.
- Representative money — Paper notes backed by gold. Could be exchanged for the real thing.
- Fiat money — Modern currency (rupees, dollars). Has value because the government says so and people trust it.
- Digital money — UPI, bank transfers, cryptocurrencies. Money without physical form.
Money Supply
The RBI tracks money supply in categories:
- M1 (Narrow money) — Currency with public + demand deposits. Most liquid.
- M3 (Broad money) — M1 + time deposits. The most commonly cited measure of money supply in India.