question_answer

Anthony and Ajay were having a conversation on the topic of 'money supply'. Anthony was of the view that since money supply consists of supply it is a flow concept, whereas Ajay was of the view that it is a stock concept. In your view, which of the two is correct? Why? Also explain the concept of money supply. Or Explain the following functions of the Central Bank.

(i) Bank of issue

(ii) Custodian of Foreign Exchange Reserves

Answer:

Ajay was correct, as supply of money is a stock concept. It refers to total stock of money held by the people of a country at a point of time.                                                                   Supply of money includes only that stock of money which is held by those who demand money and not those who supply money. Therefore, supply of money does not include: (i) Stock of money held by the government. (ii) Stock of money held by the banking system of a country. It is because government and the banking system of a country are suppliers of money.   Or (i) Bank of Issue The Central Bank of a country has the sole authority of issuing currency notes and coins in         that country. All the currency issued by the Central Bank are unlimited legal tenders. No other commercial bank or financial institution can issue these currency notes except Central Bank. Hence, the Central Bank is also known as Bank of Issue.  (iii) Custodian of Foreign Exchange Reserves Central Bank is the custodian of nation's foreign exchange reserve. The Central Bank maintains foreign exchange reserves in order to promote international trade and stabilise exchange rate to an agreed limit through managed floating,