Money and Banking Class 12 Economics Notes and Questions

Please refer to Economics Money and Banking Class 12 Economics Notes and important questions below. The Class 12 Economics Chapter wise notes have been prepared based on the latest syllabus issued for the current academic year by CBSE. Students should revise these notes and go through important Class 12 Economics examination questions given below to obtain better marks in exams

Money and Banking Class 12 Economics Notes and Questions

The below Class 12 Money and Banking notes have been designed by expert Economics teachers. These will help you a lot to understand all important topics given in your NCERT Class 12 Economics textbook.

MONEY AND BANKING

MEANING OF MONEY: Money is anything which is generally accepted as medium of exchange, measure of value, store of value and as means of standard of deferred payment.

FUNCTIONS OF MONEY: Functions of money can be classified into Primary and Secondary

Primary/Basic functions:-
i) Medium of Exchange: – It can be used in making payments for all transactions of goods and services.
ii) Measure /Unit of value: – It helps in measuring the value of goods and services. The value is usually called as price. After knowing the value of goods in single unit (price) exchanges become easy.

Secondary functions:-
i) Standard of deferred payments: Deferred payments referred to those payments which are to be made in near future.
Money acts as a standard deferred payment due to the following reasons:
a) Value of money remains more or less constant compared to other commodities.
b) Money has the merit of general acceptability.
c) Money is more durable compare to other commodity.
ii) Store of value: Money can be stored and does not lose value

Money acts as a store of value due to the following reasons:
a) It is easy and economical to store.
b) Money has the merit of general acceptability.
c) Value of money remains relatively constant

MONEY HAS OVERCOME THE DRAW BACKS OF BARTER SYSTEM:
1. Medium of Exchange: Money has removed the major difficulty of the double coincidence of wants.
2. Measure of value: Money has become measuring rod to measure the value of goods and services and is expressed in terms of price.
3. Store of value: It is very convenient, easy and economical to store the value and has got general acceptability which was lacking in the barter system.
4. Standard of deferred payments: Money has simplified the borrowing and lending of operations which were difficult under barter system. It also encourages capital formation.

MONEY SUPPLY: refers to total volume of money held by public at a particular point of time in an economy.
M1=currency held by public + Demand deposits + other deposits with Reserve Bank of India.
M2=M1+saving deposits with post office saving bank
M3=M1+net time deposit with the bank
M4=M3 + total deposits with post office saving bank excluding national saving certificate

HIGH POWERED MONEY:
Refers to, currency with the public (notes +coins) and cash reserve of banks.

MONEY CREATION/DEPOSIT CREATION/CREDIT CREATION BY COMMERCIAL BANK
Let us understand the process of credit creation with the following example.
Suppose there is an initial deposit of Rs. 1000 and L.R.R. is 20% i.e., the banks have to keep Rs. 200 and lend Rs. 800/-. All the transactions are routed through banks. The borrower
withdraws his Rs. 800/- for making payments which are routed through banks in the form of deposits account.
The Bank receives Rs. 800/- as deposit and keeps 20% of Rs.800/- i.e., Rs.160/- and lends Rs.640/- . Again the borrower uses this for payment which flows back into the banks thereby increasing the flow of deposits.

MONEY MULTIPLIER:

Money Multiplier = 1/LRR. In the above example LRR is 20% i.e., 0.2, so money multiplier is equal to 1/0.2=5.

Why only a fraction of deposits is kept as Cash Reserve?
a) All depositors do not withdraw the money at the same time.
b) There is constant flow of new deposits into the banks.

CENTRAL BANK
MEANING: An apex body that controls, operates, regulates and directs the entire banking and monetary structure of the country.

FUNCTIONS OF CENTRAL BANK:
i) Currency authority or bank of issue: Central bank is a sole authority to issue currency in the country. Central Bank is obliged to back the currency with assets of equal value
(usually gold coins, gold bullions, foreign securities etc.,)

Advantages of sole authority of note issue:
a) Uniformity in note circulation
b) Better supervision and control
c) It is easy to control credit
d) Ensures public faith
e) Stabilization of internal and external value of currency

ii) Banker to the Government: As a banker it carries out all banking business of the Government and maintains current account for keeping cash balances of the government.
Accepts receipts and makes payments for the government. It also gives loans and Advances to the government.

iii) Banker’s bank and supervisor: Acts as a banker to other banks in the country—
a) Custodian of cash reserves:- Commercial banks must keep a certain proportion of cash reserves with the central bank (CRR)
b) Lender of last resort: – When commercial banks fail to need their financial requirements from other sources, they approach Central Bank which gives loans and advances.
c) Clearing house: – Since the Central Bank holds the cash reserves of commercial banks it is easier and more convenient to act as clearing house of commercial banks.

iv) Controller of money supply and credit: – Central Bank or RBI plays an important role during the times of economic fluctuations. It influences the money supply through quantitative and qualitative instruments. Former refers to the volume of credit and the latter refers to regulate the direction of credit.

v) Custodian of foreign exchange reserves.
Another important function of Central Bank is the custodian of foreign exchange reserves. Central Bank acts as custodian of country’s stock of gold and foreign exchange reserves. It helps in stabilizing the external value of money and maintaining favorable balance of payments in the economy.

QUANTITATIVE INSTRUMENTS:
i) Bank Rate policy: – It refers to the rate at which the central bank lends money to commercial banks as a lender of the last resort.Central Bank increases the bank rate during inflation (excess demand) and reduces the same in times of deflation (deficient demand)

ii) Open Market Operations: It refers to the buying and selling of securities by the Central Bank from/ to the public and commercial banks.
It sells government securities during inflation/excess demand and buys the securities during deflation/deficient demand.

iii) Legal Reserve Ratio: R.B.I. can influence the credit creation power of commercial banks by making changes in CRR and SLR Cash Reserve Ratio (CRR): It refers to the minimum percentage of net demand and time liabilities to be kept by commercial banks with central bank.
Reserve Bank increases CRR during inflation and decreases the same during deflation Statutory Liquidity Ratio (SLR): It refers to minimum percentage of net demand and time liabilities which commercial banks required to maintain with themselves.SLR is increased during inflation or excess demand and decreased during deflation or deficient demand.

QUALITATIVE INSTRUMENTS:
1. Margin Requirements: It is the difference between the amount of loan and market value of the security offered by the borrower against the loan.Margin requirements are increased during inflation and decreased during deflation.
2. Moral suasion: It is a combination of persuasion and pressure that Central Bank
3. Selective credit controls: Central Bank gives direction to other banks to give or not to give credit for certain purposes to particular sectors.

Question. Calculate the value money multiplier and the total deposit created if initial deposit is of Rs. 500 crores and LRR is 10%.
Ans. Money multiplier = 1/LRR which is equal to 1/0.1=10
Initial deposit Rs. 500 crores
Total deposit = Initial deposit x money multiplier
= 500 x 10 = 5000 crores.

Question. If total deposits created by commercial banks are Rs.12000, LRR is 25% calculate initial deposit.
Ans. Money multiplier = 1/LRR = 1/.25 = 4
Initial deposit = Total deposit / money multiplier = 12000/4 = 3000

Question. Calculate LRR, if initial deposit of Rs. 200 cores lead to creation of total deposits of Rs. 1600 cores.
Ans. Money multiplier = Total deposits/Initial deposits = 1600/200=8
Money multiplier = 1/LRR = 8=1/LRR.
LRR = 1.25 or 12.5

Question. Define ‘money’.
Ans. Money is defined as anything which is generally accepted by the people as a medium of exchange, measure of value, store of value and standard of deferred payment.
According to professor Walker ‘Money is what the money does.’

Question. What do you mean by ‘Money supply’? Explain its components.
Ans. Money supply: It refers to stock of various forms of money held by the public at the particular point of time in an economy.

Features of money supply
1. It is the ‘stock variable’ as it is measured at a particular point of time.
2. It includes money supply with public only. The term ‘public’ means money using sectors like individuals and business firms. It does not include money creating sectors like government and banking systems as such balances do not come into actual circulation.

Components of Supply
1. Currency: It includes paper notes and coins held by the public. So, it excludes money with the government and banking sector.
2. Net demand deposits: It refers to demand deposits of the public with the commercial bank i.e. deposits of public with the banks in the form of current accounts, because such deposits can be withdrawn at any time by the account holder.
It is to be noted that net demand deposits exclude inter-bank deposits i.e. deposits by one bank into another bank.

Measures of Money Supply
M₁= Currency + Net Demand Deposits + Other deposits with RBI
M₂= M₁ + saving deposits with post office savings account
M₃= M₁ + Net time deposits with banks
M₄= M₃ + Total deposits with post office savings organisation (excluding NSC)
M₁ & M₂ = Narrow money M₃ & M₄ = Broad money

Question. What do you mean by ‘legal tender money’ and ‘optional money’?
Ans. Legal tender money: It refers to that money which is used by the government or by the monetary authority of the country. The payment or tender of it is constituted by the law as sufficient to discharge any debt. Everyone is bound to accept it as a medium of exchange or repayment of debt, its non-acceptance is an offence. It is also called fiat money as it serves as money by the order of the government.
Optional money: It refers to that non-legal tender money which is used as money based on trust that their issuer commands. It includes credit instruments like cheques, drafts, bills of exchange, etc. It is also known as fiduciary money

Question. What is bank?
Ans. Any financial institution which accepts the deposits from the public, repayable on demand, withdrawable by cheque, draft, bill of exchange, etc. and provides various types of loans and advances, is called bank.

Question. Explain the process of ‘credit creations’/ ‘money creation’/ ‘deposits creation’ by commercial bank.
Ans. The commercial bank has the power to create credit which is multi-times of initial deposits. The process of credit creation by the commercial banks is determined by two factors: –
1. The amount of initial fresh deposits.
2. Legal Reserve Ratio(SLR+CRR), it means minimum ratio of deposits legally required to be kept as a reserve by the banks.

The process of credit creation is explained on the basis of two assumptions: –
I. The entire banking system is taken as a single unit and termed as ‘Banks’.
II. The entire money that goes out of the bank is redeposited into the bank. Thus, all the receipts and payments in the economy are routed through banks.

Let legal reserve ratio be 20% and there is fresh deposit of ₹1,00,000. As required, the banks keep the 20% i.e. ₹20,000 as reserves.
Suppose the banks lend remaining ₹80,000 to the borrowers. As assumed, those who receives the payment put the money back into the bank. By this way, bank receives fresh deposits of ₹80,000, the bank again keeps 20% i.e. ₹16,000 as reserves and lends ₹64,000 which is also 80% of rest deposits. The money again comes back into the bank leading to fresh deposits of ₹64,000.
The money goes on multiplying in this way and ultimately, the total money creation is ₹5,00,000, which is shown as below

𝐓𝐨𝐭𝐚𝐥 𝐃𝐞𝐩𝐨𝐬𝐢𝐭𝐬 𝐂𝐫𝐞𝐚𝐭𝐞𝐝=1/LRR x Initial Deposits
=1/20% x 1,00,000
=₹5,00,000

Question. What is money multiplier?
Ans. It refers to measurement of total money created by the banks in the form of deposits from each unit of initial deposits.
Money Multiplier=1/LRR

Question. What is central bank?
Ans. It refers to that apex institute which controls, operates, regulates and develops monetary and banking structure of the economy. In India, it is known as Reserve Bank of India. It was established on 1st April, 1935.

Question. Explain various functions of central bank.
Ans. Functions of central bank: –
1. Bank of Issue: Central bank has given sole monopoly power to issue the currency (except one-rupee notes and coins in India as it is issued by government of India) with the objective to control over the volume of money supply and credit in the economy.
The currency issued by the central bank circulates in the economy as a legal tender money.
Central bank has to maintain the reserves of gold and foreign exchange against the notes issued by it as per the statutory rules.
2. Banker to the government: Central bank act as a banker to the government i.e. both state and central governments. All banking business of the government are carried out by the central bank.
Government has the current account with the central bank, therefore, central bank accepts receipts and makes payment on behalf of the government.
It also manages all public debts of the country. Whenever government has excess budgetary expenditure and needs loan then central bank also provides short term loans to government.
3. Banker’s bank: There are hundreds of banks in an economy, so there should be some authority to regulate and supervises their functioning and this duty is assigned to the central bank.
Central bank act as a banker’s bank in the following ways: –
(i) Custodian of cash reserves: Central bank is the holder of minimum cash reserves of commercial banks as every bank must keep a minimum proportion of total deposits with central bank in the form of reserves.
(ii) Lender of last resort: Whenever banks are short of funds and fails to meet their financial obligation from any other source, then central bank at last provides loans and advances against discounting approved securities and bills of exchange, it is known as lender of last resort.
(iii) Clearing house function: Central bank holds cash reserves of commercial banks. So, it becomes easier for it to use clearing house function. All banks have their accounts with the central bank, thus central bank can easily settle the claims of various commercial banks by making debit and credit entries in their accounts.
4. Controller of money supply and credit: Central bank not only issue the currency but also has given responsibility to control money supply and credit in the economy with the objective to maintain the price stability in the economy. For this, central bank uses monetary policy which has following instruments: –
(i) Quantitative instruments: These instruments are used to control the total volume of credit in the economy. It includes bank rate, open market operatives, cash reserve ratio and statutory liquidity ratio, repo rate and reverse repo rate.
(ii) Qualitative instruments: These instruments are used to affect direction of credit in economy. It includes moral suasion, marginal requirements and selective credit rationing.
5. Custodian of foreign exchange reserves: Central bank act as a custodian of nation’s gold and foreign exchange reserves with the objective to stabilise external value of domestic currency. All transactions of foreign currency are routed through RBI. If a person receives foreign exchange then he has to deposit it with the central bank.
Similarly, if a person needs foreign exchange to make payment in abroad, then he has to supply with the central bank.

Question. Explain various tools of monetary policy to control credit in the economy.
Ans. The policy used by central bank to control the money supply and credit in the economy is called monetary policy.

It includes following tools: –

1. Quantitative Tools
a. Bank Rate: It is the rate at which central bank lends money to commercial banks to meet their long-term needs.
(i) If central bank increases bank rate, it will further increase rate of interest by commercial banks, thus cost of borrowings will increase which discourage people to borrow from banks and lead to contraction of credit.
(ii) If central bank decreases bank rate, it will further decrease rate of interest by commercial banks, thus cost of borrowings will decrease which encourage people to borrow from banks and lead to expansion of credit.
b. Open Market Operations: It refers to buying and selling of government securities by the central bank in the open market from and to public and commercial banks.
(i) If central bank sells government securities in the open market, then it will reduce bank deposits, so capacity of banks to offer credit will decrease and lead to contraction of credit.
(ii) If central bank purchases government securities in the open market, then it will increase bank deposits, so capacity of banks to offer credit will increase and lead to expansion of credit.
c. Cash Reserve Ratio (CRR): It refers to that minimum percentage of total deposits which a bank must keep with the central bank in the form of reserves.
(i) If central bank increases CRR, it means bank has to now keep more proportion of deposits with the central bank, then thus availability of funds with the bank for credit will decrease and will lead to contraction of credit.
(ii) If central bank decreases CRR, it means bank has to now keep less proportion of deposits with the central bank, then thus availability of funds with the bank for credit will increase and will lead to expansion of credit.
d. Statutory Liquidity Ratio (SLR): It refers to that minimum percentage of total deposits which a bank has to keep with itself in the form of liquid assets.
(i) If central bank increases SLR, it means bank has to now keep more proportion of deposits with itself, thus capacity of banks to offer credit will decrease and lead to contraction of credit.
(ii) If central bank decreases SLR, it means bank has to now keep less proportion of deposits with itself, thus capacity of banks to offer credit will increase and lead to expansion of credit.
e. Repo Rate: It is the rate at which central bank leads money to commercial banks to meet their short-term needs. The central bank provides short-term loans by discounting approved securities and bills of exchange.
(i) If central bank increase repo rate, it will further increase rate of interest by commercial banks, thus cost of borrowings will decrease which discourage people to borrow from banks and lead to contraction of credit.
(ii) If central bank decrease repo rate, it will further decrease rate of interest by commercial banks, thus cost of borrowings will increase which encourage people to borrow from banks and lead to expansion of credit.
f. Reverse Repo Rate: It is the rate at which central bank borrows from commercial banks.
(i) If central bank increases reverse repo rate, it includes banks to transfer the funds to the RBI in the attraction of higher rate of interest, thus, capacity of banks to offer credit to public will decrease and lead to contraction of credit.
(ii) If central bank decreases reverse repo rate, it includes banks to transfer the funds to the RBI because of lower rate of interest, thus, capacity of banks to offer credit to public will increase and lead to expansion of credit.

2. Qualitative Tools
a. Marginal requirements: It is the difference between market value of securities offered and amount of loan sanctioned.
(i) If central bank increases marginal requirements, so less credit will be offered against the security by the banks and lead to contraction of credit.
(ii) If central bank decreases marginal requirements, so more credit will be offered against the security by the banks and lead to expansion of credit.
b. Moral suasion: It is the method adopted by central bank to persuade or convince commercial banks in order to advance the loans in accordance with direction of central banks for expansion or contraction of credit.

Barter Exchange System
Barter Exchange refers to exchange of goods for goods. An economy, where there is a direct barter of goods and services, is called a ‘Barter Economy’.

Limitations of Barter Exchange
1. Lack of Double Coincidence of Wants: Barter system can work only when both buyer and seller are ready to exchange each other’s goods. For example, A can exchange goods with B only when A has what B wants and B has what A wants. However, such double coincidence is very rare.
2. Lack of Common Measure of Value: In the barter system, all commodities are not of equal value and there is no common measure (unit) of value of goods and services, in which exchange ratios can be expressed. For example, if A has wheat and B has rice, then it is difficult to decide, how much wheat is needed to exchange with one kilogram of rice.
3. Lack of Standard of Deferred Payment: Under barter system, contracts involving future payments or credit transactions cannot take place with ease because of the following reasons:
a) The borrower may not be able to arrange goods of exactly same quality at the time of repayment.
b) There may be conflicts regarding which specific commodity id to be used for repayment.
c) The commodity, to be repaid, may lose or gain its value at the time of repayment.
So, it is very difficult to make deferred payments in the form of goods.
4. Lack of Store of Value: Under barter system, it is difficult for people to store wealth for future use because:
a) Most of the goods (like wheat, rice, vegetables, etc.) do not possess durability, i.e. their quality deteriorates with passage of time.
b) Storage of goods requires time and efforts.
As a result, goods can not be used to store the earnings for a long period.

Functions of Money
The functions of money can be broadly categorised under two heads:
1. Primary Functions (Main or Basic Functions)
2. Secondary Functions (Subsidiary or Derivative Functions)

Primary Functions
Primary functions include the most important functions of money, which it must perform in every country. These are:
(i) Medium of Exchange
Money, as a medium of exchange, means that it can be used to make payment for all transactions of goods and services.
(ii) Measure of Value
Money as a measure of value means that money works as a common denomination in which values of all goods and services are expressed.

Secondary Functions
These refer to those functions of money which are supplementary to the primary functions. These functions are derived from primary functions and, therefore, they are also known as ‘Derivative Functions’.
The major secondary functions are:
(i) Standard of Deferred Payments
Money as a standard of deferred payments means that money acts as a ‘standard’ for payments, which are to be made in future.
(ii) Store of Value (Asset Function of Money)
Money as a store of value means that money can be used to transfer purchasing power from present to future.

Money has overcome the drawbacks of Barter System
Barter System makes the exchange process very difficult and highly inefficient. Money has overcome the drawbacks of barter system in the following manner:
1. Medium of Exchange: As a medium of exchange, money has removed the major difficulty of lack of double coincidence of wants in the barter system. It separates the act of sale and purchase of goods and services and helps both the parties in obtaining maximum satisfaction. A buyer can buy goods through money and seller can sell goods for money.
2. Measure of Value: Under barter system, different goods were of different values and there was no common denomination to express their change ratios. But money is the measuring rod which expresses the value of other commodities. It becomes easier to compare the relative values of any two commodities.
3. Store of Value: Under barter system, it is very difficult to store goods for future use. Most of the goods are perishable and their storage requires huge space and transportation cost. But money can be easily stored for future use. It is the most convenient and most economical means of storing earnings and wealth.
4. Standard deferred payments: Barter system lacks suitable standard of deferred payments which creates difficulty in credit transactions. Borrower may not be able to arrange goods of exactly the same quality at the time of repayment. On the other hand, due to general acceptability of money, future payments are expressed in the terms of money. Money has simplified the borrowing and lending operations and encouraged capital formation.

Functions of Commercial Bank
The functions performed by commercial banks can be broadly categorised under two heads:
(1) Primary Function;
(2) Secondary Functions.

Primary Functions
Commercial banks can perform two primary functions:
(1) Accepting Deposits;
(2) Advancing of Loans

1. Accepting Deposits
It is the most important function of commercial banks. They accept deposits in several forms according to requirements of different sections of the society. The main kinds of deposits are:
(i) Current Account Deposits or Demand Deposits: These deposits refer to those deposits which are repayable by the banks on demand.
• Such deposits are generally maintained by businessmen with the intention of making transactions with such deposits.
• They can be drawn upon by a cheque without any restriction.
• Banks do not pay any interest on these accounts. Rather, banks impose service charges for running these accounts.
(ii) Fixed Deposits or Time Deposits: Fixed deposits refer to those deposits, in which the amount is deposited with the bank for a fixed period of time.
• Such deposits do not enjoy checkable facility.
• These deposits carry a high rate of interest.
(iii) Saving Deposits: These deposits combine features of both current account deposits and fixed deposits.
• The depositors are given cheque facility to withdraw money from their account. But some restrictions are imposed on number and amount of withdrawals, in order to discourage frequent use of saving deposits.
• They carry a rate of interest which is less than interest rate on fixed deposits.
It must be noted that Current Account deposits and Saving deposits are chequable deposits, whereas Fixed deposit is a non-chequable deposit.

2. Advancing of Loans
The deposits received by banks are not allowed to remain idle. So, after keeping certain cash reserves, the balance is given to needy borrowers and interest is charged from them, which is the main source of income for these banks. Different types of loans and advances made by Commercial banks are:
(i) Cash Credit: Cash credit refers to a long to the borrower against his current assets like shares, stocks, bonds, etc. A credit limit is sanctioned and the amount is credited in his account. The borrower may withdraw any amount within his credit limit and interest is charged on the amount actually withdrawn.
(ii) Demand Loans: Demand loans refer to those loans which can be recalled on demand by the bank at any time. The entire sum of demand loan is credited to the account and interest is payable on the entire sum.
(iii) Short-term Loans: They are given as personal loans against some collateral security. The money is credited to the account of borrower and the borrower can withdraw money from his account and Interest is payable on the entire sum of loan granted.

Secondary Functions
In addition to primary functions, commercial banks also perform the following secondary functions:

1. Overdraft Facility
It refers to a facility in which a customer is allowed to overdraw his current account upto an agreed limit This facility is generally given to respectable and reliable customers for a short period. Customers have to pay interest to the bank on the amount overdrawn by them.

2. Discounting Bills of Exchange
It refers to a facility in which holder of a bill of exchange can get the bill discounted with bank before the maturity. After deducting the commission, bank pays the balance to the holder. On maturity bank gets its payment from the party which had accepted the bill.

3. General Utility Functions
Commercial banks render some general utility services like:
(i) Locker Facility: Commercial banks provide facility of safety vaults or lockers to keep valuable articles of customers in safe custody.
(ii) Traveler’s Cheques: Commercial banks issue traveler’s cheques to their customers to avoid risk of taking cash during their journey.
(iii) Letter of Credit: They also issue letters of credit to their customers to certify their creditworthiness.
(iv) Underwriting Securities: Commercial banks also undertake the task of underwriting securities. As public has full faith in the creditworthiness of banks, public do not hesitate in buying the securities underwritten by banks.
(v) Collection of Statistics: Banks collect and publish statistics relating to trade, commerce and industry. Hence, they advise customers on financial matters.

Ex-Ante Saving and Ex-Ante Investment
Ex-ante saving refers to amount of saving which households (or savers) plans to save at different levels of income in the economy. The amount of ex-ante or planned saving is given by the saving function (or propensity to save).

Ex-ante investment refers to amount of investment which firms plans to invest at different levels of income in the economy. The amount of ex-ante or planned investment is determined by the relation between investment demand and rate of interest, i.e. by investment demand function.
Equilibrium occurs when Ex-ante saving = Ex-ante investment.

In an economy, equilibrium is determined when planned saving is equal to planned investment. However, both these concepts are equal only at equilibrium level of income. It happens because of three reasons:
(i) Generally, saving is done by households and investment is done by firms. So, savers and investors are different people with different priorities.
(ii) Saving is made in small amount and investment is made in big amounts.
(iii) Saving is made for meeting future uncertain events or contingencies, whereas, investment is made for profit motive.

Ex-Post Saving and Ex-Post Investment
Ex-post saving refers to the actual or realized saving in an economy during a year. Ex-post or actual saving is the sum total of planned saving and unplanned saving. Ex-post investment refers to the realized or actual investment in an economy during a year. Ex-post or actual investment is the sum total of planned investment and unplanned investment.

It must be noted that ex-post saving and ex-post investment are equal at all levels of income. This equality between the two is brought by fluctuations in income.

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