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Theories Money

Essay by   •  October 11, 2011  •  Essay  •  302 Words (2 Pages)  •  1,137 Views

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I. Theories

1.1. Money

1.1.1. Definition

Money is the set of assets in the economy that people regularly use to buy goods and services from other people.

1.1.2. The types of Money

3 types:

-Commodity money: money takes the form of a commodity with intrinsic value. The term "intrinsic value" means that the item would have value even if it were not used as money. Gold, silver and cigarettes are some examples of commodity money.

-Fiat money: Money without intrinsic value. A fiat is simply an order or decree, and fiat money is established as money by government decree.

-Credit money: check, demand deposit

1.1.3. The functions of Money

Money has 3 functions: a medium of exchange, a store of value and a unit of account.

-As a medium of exchange, money is what we use to buy goods and services.

-As a store of value, money is a way to transfer purchasing power from the present to the future. If I work today and earn $100, I can hold the money and spend it tomorrow, next week, or next month.

-As a unit of account, money provides the terms in which prices are quoted and debts are recorded.

Economists use the term liquidity to describe the ease with which an asset can be converted into the economy's medium of exchange. Because money is the economy's medium of exchange, it is the most liquid asset available.

-Currency (Mo):the paper bills and coins in the hands of the public. Currency is clearly the most widely accepted medium of ex-change in our economy (the highest liquidity and no interest earning)

-Narrow money(M1)=Mo+ Traveler's checks

+ Demand deposits

+other checkable deposits

-Broad money(M2)=M1 +Savings deposits

+Small time deposits

+Money market mutual funds

+A few minor categories

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