Reserve Money:

Reserve Money (i.e., RM) might be considered as Government money. Reserve money is the money cash held by the public and banks.

It is compiled of:

C = currency with the public in circulation
OD = other deposits of the public and
CR = cash reserves of banks.

Cash reserves are comprised of two portions:-

They are:

(1) Cash reserves with banks themselves and
(2) Bankers deposits with RBI.

Therefore,

Reserve Money (RM) = C+ OD + CR

We might note that the simple theory of money supply defines that supply of money (M) is a rising function of reserve money (i.e., RM). In another word, since Reserve Money changes, supply of money also modifies.

The Reserve money is also termed as high powered money on account of its big persuade on money supply.

Fiat Money:

Currency notes in circulation are generally termed to as fiat money. For illustration, one Rupee notes issued by the Government is Fiat money.

The notes issued by the bank are generally referred to as bank notes. They are in the environment of promissory notes.

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