Explanation
Central bank is an apex bank that controls the entire banking system of a country. It is the sole agency of note issuing and controls the supply of money in the economy. It serves as the banker of the government and manages foreign exchange of the government. Therefore, the main function of commercial bank is to create credit and not to control it. It is the central bank that deals in the control of credit in the economy.
Money supply refers to the total stock of money of all types ( currency as well as demand deposits) held by the people of a country at a given point of time.
Money supply is measured in several ways among which M1 is a type of measurement that measures the money as a medium of exchange function.
M1= C+ DD+ OD
where,
C: It refers to currency held by public in terms of coins and paper notes.
DD: It refers demand deposits of the people with the commercial bank.
OD: These includes other deposits with public financial institution, foreign central banks and international financial institution.
Barter system was a system of exchange where goods were exchanged for goods and there was no common medium of exchange in the economy. Barter system had many drawbacks like lack of double coincidence of wants, lack of a common unit of value, difficulty of future payments or contractual payments and difficulty of storage of value and transfer of value.
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