What is High Powered Money ? Explain.
High Powered Money :
- High powered money refers to the monetary base or the total amount of money that is in circulation in an economy.
- High powered money or monetary base refers to the money produced or issued by RBI and Government of India.
- Alternatively total liability of monetary authority of the country and RBI is called monetary base or high powered money (H).
- It consists of (1) Currency (notes and coins) held by the public (C), (2) Cash reserve of Commercial banks (R) and (3) Other deposits with RBI (OD).
H = C + R + OD
Where, H = high powered money
C = Cash currency with Public
R = Cash reserve with Banks
OD = Other Deposits with RBI
- High powered money is different from ordinary money (M1), which consists of (1) Currency held by Public (C), (2) Demand deposits in banks (DD) and (3) Other Deposits with RBI (OD).
Therefore, M1 = C + DD + OD
- In high powered money if any person produces a currency note to RBI, the latter must pay him value equal to the figure printed on the note.
- Since overall money supply depends ultimately on the monetary base – the amount of money issued by the central bank, it is called monetary base.
- Since this monetary base has multiplied effect on the money supply – it is termed as high powered money.
- An increase in the central bank money leads to more than one – for – one increase in the overall money supply, it is called high powered money.
Uses of High Powered Money:
1. Monetary Policy:
High powered money is an important tool that is used by the central bank to implement monetary policy. By changing the level of high powered money in the economy, the central bank can influence interest rates and inflation.
2. Bank lending:
Banks use high powered money to make loans and investments. By increasing the level of high powered money, the central bank can encourage banks to lend money, which can stimulate economic growth.
3. Payments :
High powered money is used in day – to – day transactions such as buying goods and services. It is also used for settling payments between banks.
Importance of Money:
Money performs invaluable economic services in modern society. Money is the pivot around which all economic activities revolve. The following facts highlight the importance of money.
1. Importance of money to the Consumers:
Money is very important to the consumers. As sellers of the factor services, household sells their factor services such as land, labour etc. in exchange for money and earn money income thereby. Then they use this money income in purchasing goods and services. Prices of goods and services are expressed in terms of money. So it is easier to compare their prices and take decision about which commodity they should buy and in what quantity so as to maximise their total satisfaction.
2. Significance of money in Production:
Money is equally important to the producers, enabling them to take decisions regarding ‘what to produce’ and ‘how to produce’.
The producers can easily compare the money cost and money income of the different levels of the output and decide about the level of output at which it maximise their profit by equating marginal cost with marginal revenue.
Producers can also easily decide about how many units of factor input to be employed by comparing their marginal revenue of producing one unit with marginal cost of its production.
To maximise the profits producers can easily equate marginal revenue of a factor to the marginal cost of that factor.
3. Significance of money in Trade:
Money serves as a medium of exchange, a common measure of value, store of value standard of deferred payment, all these functions of money makes it very important for trade and for economic growth.
Since the prices of goods and services are expressed in terms of money, it has removed the difficulties of barter system specially the double coincidence of wants and a common measure of value and helped in the economic growth and development of all the countries in the world.
Money also facilitate the process of exchange, without money, trade and exchange would have cost a lot of time and energy.
4. Importance in Capital Formation :
Capital formation refers to the process of adding to the stock of capital. This requires increase in investment. Savings provide the necessary funds for undertaking investment.
Saving is done in the form of money. Savings are promoted and mobilised by financial instruments like commercial banks from general public.
These funds are lent to producers to enable them to undertake investment. Money is involved in all these stages – savings, borrowing and lending and investment.
5. Importance in Public Finance:
Money is of great help in the field of public finance. Public finance relates to the revenue and expenditure of the government.
The magnitude of public finance in a modern economy is so vast that it can not be managed without money. Taxes, fees, fines and other forms of revenue of the government are realised in terms of money.
These revenue proceeds are spent on various development and other projects undertaken by the government also in terms of money.
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