Chapter 15, Problem 15.1LO

To determine

Functions of money, properties of money and official definitions of the money supply.

Explanation of Solution

There are four functions of money, these are as follows:

(a) Medium of exchange: It means the payment for exchange of goods and services have to be made in terms of money. Goods and services are exchanged for money when people either buy things or sell things.

• It solves the problem of double coincidence of wants inherit in barter system.
• It facilitates trade and wider its area.
• It is essential for conducting transactions in a market economy.

(b) Measure of value: Since money is generally acceptable works as a common denominator in which values of all goods and services are expressed. When the value of a commodity is expressed in terms of money, it is known as single unit (price), it becomes easy to find out the exchange ratio between them. Money helps in calculating relative prices of goods and services.

(c) Standard of deferred payment: It refers to those payments which are to be made in near future. Credit transactions have become the life and blood of modern economic system. Every day, millions of transactions take place in which payments are not made immediately. Money helps and encourages such transactions & helps in capital formation, economic development of the country.

• It has facilitated the borrowings and lending activities.
• It has lead to the creation of financial institutions.

(d) Store value: Money as a store value means that money is an asset and can be used to store to use in future. One can hold one’s earnings until the time one wants to spend it.

• It comes in convenient denomination.
• It is easily portable. It requires less space.
• It is easily exchanged for goods at all time.

The properties of money are:

(1) Durable: It means that money is durable and can be withstand being used repeatedly.

(2) Divisible: It can divided into smaller units.

(3) Limited in supply: The supply of money is controlled by the government. Nobody other than government can supply the money in the country.

(4) Portable: Money is portable. The individuals can carry it easily wherever they go and transfer it to others.

The official definitions of money supply are given below:

Money supply refers to the official stock of money supplied in a country at a particular point of time. There are some measures of money supply, these are:

${\text{M}}_1$. Currency in circulation + Demand deposits.

${\text{M}}_2$. ${\text{M}}_1$. Short term time deposits in the banks & 24-hour money market funds.

${\text{M}}_3$. ${\text{M}}_2$. Long-term time deposits & money market funds with more than 24-hour maturity.

${\text{M}}_4$. ${\text{M}}_3$. other deposits.

Economics Concept Introduction

Introduction:

Money: It is generally accepted as a medium of exchange of goods and services.