Chapter 3 · Question 2
Describe modern forms of money.
Answer
Direct Answer
Modern forms of money include currency notes, coins, and demand deposits with banks. Demand deposits can be withdrawn when needed and used through cheques, cards, or digital transfers, making them widely accepted for payments.
Simple Explanation
Modern money is mainly currency (notes and coins) and bank deposits you can withdraw anytime. Deposits work as money because you can pay via cheque, card, or online transfer without using cash.
Exam-Ready Structure
Modern forms of money have evolved beyond physical coins and notes:
1. Currency (coins and paper notes):
• Issued by the Reserve Bank of India (RBI) on behalf of the central government.
• Currency notes are a 'promise' by the RBI to pay the bearer the stated amount — they have value because the law and the government back them (they are 'legal tender').
• Coins are minted by the Government of India.
• All citizens are legally obliged to accept currency as payment within India.
2. Demand deposits with banks:
• People deposit money in bank accounts. These deposits are called 'demand deposits' because they can be withdrawn on demand by the depositor.
• Demand deposits themselves function as money because they can be used directly for payments without withdrawing cash.
3. Instruments for using deposits as money:
• Cheques: A written instruction to the bank to pay a specified amount from the depositor's account to the person named on the cheque. The cheque itself is a payment instrument, not money — the underlying deposit is the money.
• Debit cards and credit cards: Allow direct electronic payment from bank accounts without paper cheques.
• Digital/online transfers: Internet banking, UPI (Unified Payments Interface), mobile wallets, and NEFT/RTGS allow instant transfer of money between bank accounts.
The key feature of modern money is that it is not backed by gold or silver — it is 'fiat money,' whose value comes from government decree and public trust. Bank deposits, backed by currency and regulated by the RBI, form the largest part of the money supply in a modern economy.
Key Points
- Modern forms of money include currency notes, coins, and demand deposits with banks.
- Demand deposits can be withdrawn when needed and used through cheques, cards, or digital transfers, making them widely accepted for payments.