Case study on bills of exchange

Features, Contents and Advantages Article shared by: Let us make in-depth study of the definition, features, contents, parties and advantages of bills of exchange.

Case study on bills of exchange

Definition[ edit ] InPhillip Cagan wrote The Monetary Dynamics of Hyperinflation, the book often regarded as the first serious study of hyperinflation and its effects [4] though The Economics of Inflation by C. Bresciani-Turroni on the German hyperinflation was published in Italian in [5].

It does not establish an absolute rule on when hyperinflation arises. Instead, it lists factors that indicate the existence of hyperinflation: Amounts of local currency held are immediately invested to maintain purchasing power The general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency.

Causes[ edit ] While there can be a number of causes of high inflation, most hyperinflations have been caused by government budget deficits financed by money creation.

Peter Bernholz analysed 29 hyperinflations following Cagan's definition and concludes that at least 25 of them have been caused in this way. Most hyperinflations in history, with some exceptions, such as the French hyperinflation ofoccurred after the use of fiat currency became widespread in the late 19th century.

The French hyperinflation took place after the introduction of a non-convertible paper currency, the assignats. Money supply[ edit ] Hyperinflation occurs when there is a continuing and often accelerating rapid increase in the amount of money that is not supported by a corresponding growth in the output of goods and services.

The price increases that result from the rapid money creation creates a vicious circle, requiring ever growing amounts of new money creation to fund government deficits.

Hence both monetary inflation and price inflation proceed at a rapid pace. Such rapidly increasing prices cause widespread unwillingness of the local population to hold the local currency as it rapidly loses its buying power.

Instead they quickly spend any money they receive, which increases the velocity of money flow; this in turn causes further acceleration in prices. This means that the increase in the price level is greater than that of the money supply. Here M refers to the money stock and P to the price level.

This results in an imbalance between the supply and demand for the money including currency and bank depositscausing rapid inflation. Very high inflation rates can result in a loss of confidence in the currency, similar to a bank run.

Usually, the excessive money supply growth results from the government being either unable or unwilling to fully finance the government budget through taxation or borrowing, and instead it finances the government budget deficit through the printing of money.

Inflation is effectively a regressive tax on the users of money, [11] but less overt than levied taxes and is therefore harder to understand by ordinary citizens.

Case study on bills of exchange

Inflation can obscure quantitative assessments of the true cost of living, as published price indices only look at data in retrospect, so may increase only months later.

Monetary inflation can become hyperinflation if monetary authorities fail to fund increasing government expenses from taxesgovernment debtcost cutting, or by other means, because either during the time between recording or levying taxable transactions and collecting the taxes due, the value of the taxes collected falls in real value to a small fraction of the original taxes receivable; or government debt issues fail to find buyers except at very deep discounts; or a combination of the above.

Theories of hyperinflation generally look for a relationship between seigniorage and the inflation tax. In both Cagan's model and the neo-classical models, a tipping point occurs when the increase in money supply or the drop in the monetary base makes it impossible for a government to improve its financial position.

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Thus when fiat money is printed, government obligations that are not denominated in money increase in cost by more than the value of the money created. The price of gold in Germany, 1 January — 30 November The vertical scale is logarithmic.

From this, it might be wondered why any rational government would engage in actions that cause or continue hyperinflation. One reason for such actions is that often the alternative to hyperinflation is either depression or military defeat. The root cause is a matter of more dispute.

In both classical economics and monetarismit is always the result of the monetary authority irresponsibly borrowing money to pay all its expenses. These models focus on the unrestrained seigniorage of the monetary authority, and the gains from the inflation tax.

In neo-classical economic theory, hyperinflation is rooted in a deterioration of the monetary basethat is the confidence that there is a store of value that the currency will be able to command later.

In this model, the perceived risk of holding currency rises dramatically, and sellers demand increasingly high premiums to accept the currency.

This in turn leads to a greater fear that the currency will collapse, causing even higher premiums. One example of this is during periods of warfare, civil war, or intense internal conflict of other kinds:In case of the order being conditional the instrument will not be a valid bill of exchange.

Thus the following will not be valid bills of exchange: An instrument containing an order to pay. (a) 20 days after the arrival of the ship Harsha at Kochin.

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(b) When I marry Krishna. (c) When you can conveniently do so. 4. Promissory Notes and Bills of Exchange are independent payment undertakings (debt obligations) from one person to another. They are codified under the Bills of Exchange Act , which were developed and interpreted by courts.

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Case study on bills of exchange

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Advantages of Bill of Exchange The bills of exchange as instruments of credit are frequently accepted in business because of the following advantages: Framework for relationships: A bill of exchange represents a device, which provides a framework for enabling the credit transaction between the creditor and debtor on an agreed basis.

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