Types of Money can be classified into different groups. If you are a Student of Business Finance, you must know different kinds of money. These are given below:
Actual money is that which actually circulates in the economy as a medium of exchange. It is the actual noney, in terms of which all payments are made and general purchasing power is held. In Pakistan, notes and coins of all denominations are actual money
Money of Account:-
Money of account is that in terms of which prices are expressed and accounts are maintained. Normally, actual money and money of account are the same but sometimes they are different. For example, paisa is a money of account in Pakistan but it is not actual money. Now-a-days, it is no more in circulation.
Money made of metal such as gold, silver is called metallic money. Coins of all denomination circulating in economy are examples of metallic money. Metallic money is classified into following to categories.
Full bodied money
If the face value of money is equal to its value as a commodity, it is called full bodied money. If a gold coin of face value Rs. 100/- contains gold worth of Rs. 100/- it will be called full bodied money or sometimes standard money
If the face value of money is more than its value as commodity or intrinsic value it is known as token money.
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Money made of paper is called paper money. It includes of different denomination Paper money is further classified into following forms.
Representative Paper Money:-
If paper money is issued by keeping hundred percent gold reserve of full bodied coins or gold bullion, it will be called representative money
Convertible Paper Money
If paper money can be converted into gold coins or gold bullion on demand it is referred to as convertible money. This type of paper money is issued by keeping metallic reserve of equal amount behind it.
Fiat or In convertible Paper Money Paper money which cannot be converted into full bodied coins or gold bullion on demand is called in convertible paper money. It is usually issued without keeping metallic reserve behind it.
Legal Tender Money
Legal tender money is that which has a legal approval behind it and people are bound by law to accept it in all payments. Nobody can refuse to accept it. Legal tender money can be classified into (i) Limited legal tender (ii) Unlimited legal tender.
Limited Legal Tender:-
It is that form of legal tender money which can be given in payments only up to a certain limit. The payee can refuse to accept it beyond that limit. In many Asians countries 25 paisa coin and coins of low denominations are limited legal tender. These coins can be given in payments up to 50 rupees only.
Unlimited Legal Tender:- Unlimited legal tender means that money which can be given in payments up to any limit.
Optional money is that form of money which is used as a medium of exchange but it has no legal force behind it. It includes credit instruments like cheques, bills of exchange and CDRs etc which are generally acceptable in payments.
The term paper money applies to bank notes and govt, notes which pass freely from hand to hand as a medium of exchange. Cheques and bills of exchange are not included in paper money because they are not generally acceptable in payments.
Representative Paper Money:-
Representative paper money is that which has a 100% metallic reserves behind it. The holder of such money can convert it into gold or silver on demand.