Importance of Near Money

Importance of Near Money:

Near money holds a great importance in the monetary set up. This is explained in the following heads.

1.         Spending & Consumption:

The quantity and stock of near money directly affects the spending and consumption volume of the economy. When the amount of near money is high this means people have less of perfectly liquid money, so they are able to consume and spend less. On the other hand, if more people-are holding their wealth in perfectly liquid form, there will be tendency to spend it and this will increase the consumption expenditure of economy.

2.         Inflationary Trends:

Quantity of near money and their conversion directly affects trends of economy. If during boom period, people convert their near money in perfectly liquid money, then this will increase the spending and will lead to inflation in the economy.

3.         Economic Policies:

Near money are also important determinant of economic policies. If there are inflationary trends in the economy, government increases the interest rate. TTiis directs people to convert their cash in near money to gain interest. This will reduce the cash holdings and will help to decrease inflation. On the other hand, if government wants to generate rapid economic activity it reduces the interest rate. This induces people to convert their near money into cash and enjoy current consumption.

4.         Liquidity Preference:

Near money is also an important factor of liquidity preference theory of Keynes. According to this theory the quantity of near money in the economy has an important bearing on the rate of interest and the equilibrium quantity of money supply. The degree of willingness of the people to hold wealth in the form of near money and other interest earning assets affect the level of interest rates prevailing in the economy.

Use as Security:

Near money are also used as security to obtain loans and credits from banks and other financial institutions. Banks also grant loans against investment in different deposit schemes. Near money are generally shown under the current asset in the balance sheet. Thus it also effects the current ratio of the business.