What Is Money Essay Research Paper What

What Is Money. Essay, Research Paper

What is .money.. How is the supply of money affected by the aims and the

actions of the commercial banks, the central bank, and the government.s

financing of the PSBR.The Concise

Oxford Dictionary defines money as .a current medium of exchange.. This definition,

if rather sparse, does detail the essential nature of money: it is a recognised

form of exchange for goods and services. It can take many forms: anything which

is accepted by the seller, because it has a recognised value which can be used

to purchase further goods and services, will suffice as money. Why money

exists, even in centrally planned economies, is because it is efficient. A

barter economy, in which no money was used, requires those wishing to make a

transaction to exchange goods and services. The complexities involved in such a

system are immense. For example, an apple seller, wishing to obtain a hammer,

would not only have to find a toolmaker wishing to obtain apples, but would

also need to make an agreement regarding the appropriate apples/hammer exchange

rate. The former problem is known by economists as a .double coincidence of

wants., whilst the latter demonstrates the hassle of having to know relative

prices, not only for apples and hammers, but also for every other good or

service in the market. If, however, one good becomes the numeraire good, and

the value of every other good or service was measured in relation to it,

transactions will be made much more easily. This numeraire good would become

the money of the economy. To be effective,

money will have to fulfil some or, preferably, all of the following. It must be

accepted as a unit of account and a means of exchange or payment, be durable,

scarce, easily dividable, and stable in value. In modern

societies, coins and notes (token money) are obvious forms of money, but money,

and the money supply, takes on more forms than just these. Hard currency,

such as notes and coins, are considered the most liquid monetary asset there

is, as it can quickly be turned into money. Its liquidity is very convenient,

but it does not hold its value as well as other assets, as not only does it not

earn interest, but also its real value will drop during periods of inflation.

.1 is still .1 after a period of time, but due to inflation its purchasing power

will be less. Less liquid assets earn interest and thus are not as affected as

money is by inflation, although they are harder to convert to money. It can be

argued that sight deposits, which are instant access chequing accounts, are

only slightly less liquid than money, as cheques are accepted as a form of

payment. Wealth need not

be only stored in money, but in other, less liquid assets. The amount of money

in an economy is a necessary tool for fiscal policy, and thus it is necessary

to know how it can be calculated. The supply of

money is the stock of liquid assets in an economy which can be exchanged for

goods or services. It is not simply the number of notes, coins, and deposits of

banks held at the central bank). This has a number of names: it may be called

the monetary base, high-powered money, M0, or narrow money. This definition

of the money supply is rather limited, being not much more than a mere

description of how much token money is in circulation and how much is lodged at

the central bank. Although other,

wider definitions are used, known as broad money, the most common one is M4.

This covers all that M0 does, but also non-interest-bearing bank deposits,

other bank retail deposits, retail shares and deposits at building societies,

and wholesale deposits (including certificates of deposits) at banks and

building societies. It has been argued that the simple summing of M4 to

estimate the money supply takes account neither of the liquidity of the various

assets nor of their differing abilities to earn interest. M4, it is said,

erroneously presumes they are perfect substitutes. The Divisia Index avoids

these problems by weighting each component of m4 according to their role in

transactions. This, though, will not affect the theory discussed below. M4 is therefore

far larger than M0, and this is mainly due to the actions of banks. If banks

merely stored all that was deposited in them, the money supply would not be

increased. However, banks realise that not all that is deposited in them will

be withdrawn at the same time. Thus, they contribute to the money supply by

loaning money. This can be explained by the use of an example: .100 is

deposited in a bank, which has estimated that only 10% of deposits need to be

kept (this is its reserve ratio). It now has liabilities of .100, and assets of

.100. In order to keep to its 10% ratio, it loans .90 to another customer,

keeping .10 in reserves. The money supply has increased by .90 . the original

deposi

Внимание, отключите Adblock

Вы посетили наш сайт со включенным блокировщиком рекламы!
Ссылка для скачивания станет доступной сразу после отключения Adblock!

Скачать