Functions of money

“The Monetary System”

Contents

Definition of Money…
Kinds Of Money
Functions Of Money
The Demand For Money
Four Money

What is Money????

“Money is a good that acts as a medium of

Properties Of Money

Liquidity
Scarcity
Portability
Uniformity

Kinds Of Money

Commodity money
Convertible paper money
Inconvertible money
Bank deposits

Commodity money

Can be used for other purposes.
Have inherent value.
Examples
Gold, Silk,

Convertible Paper Money

The paper money that can be convertible into gold

Inconvertible Paper Money

The paper money that can’t be converted into Gold

Bank Deposits

In current society most of the money used is Bank

Electronic Money

The money stored in certain electronic cash cards.
Transactions are made

Functions of Money

Money as Medium of Exchange

No wastage of time.
Higher volume of transactions.
Remove

Money as a unit of Account

Provide a common measurement for the

Money as a store of Value

Ability of money to store value

Are credit cards money???

Why people hold money???

Three motives of holding money!!!

Transactions Demand
Precautionary Demand
Speculative Demand

Transactions Demand

Stock of money to pay everyday expenses.
Quick and easy purchases

Precautionary Motives

The stock of money for uncertain expenses.
People who don’t want

Speculative Motives

Holding of money due to the expected rise in interest

INTEREST

The major factor to determine the stock of money

Money Supply Definitions

Monetary Base

M1
Sum of currency in the hands of non-public and

Broad Money

M3 plus the public’s deposits at non-bank financial institutions

Currency

Includes coins and paper money.
It constitute 20% of the M1

Cheque Account Deposits

The total of cheque accounts balances in banks

Determination of Interest Rate

Equilibrium Interest Rate

Excess quantity of money demanded

Excess money demand

Interest rate rises

People sell Bonds

Bonds

Excess quantity of money supplied

Excess money supplied

Interest rate falls

People buy Bonds

Bonds