Money and Monetary Systems

Barter

Barter is the exchange of goods and services for other goods and services without using money.

Money

Regardless of the form it takes (e.g., euro bill), money is anything that functions as a medium of exchange, store of value, or standard of value.

Money Supply

Money supply is the sum of the cash money (coins and banknotes).

Monetary Aggregates

Monetary aggregates are broad categories that measure the money supply in an economy, established by the European Central Bank. Monetary aggregates are used to measure the money supply in a national economy.

• M1: Physical paper and coin currency in circulation, plus bank reserves held by the central bank, also known as the monetary base.
• M2: All of M1, plus traveler's checks and demand deposits.
• M3: All of M1, money market shares, and savings deposits.

Types of Money

Divisibility

Divisibility means that the item used as money can be easily divided into smaller units/pieces so that it can match commodity values more precisely/exactly.

Stability

Stability exists when money's value does not vary too much.

Acceptability

People that use money must agree that it is a valid medium of exchange; they must accept it.

Portability

Portability refers to the ease with which money can be carried from place to place.

Durability

Money can be used over and over again, and it lasts a long period of time.

Creation of Money

Creation of money is the process by which the money supply of a country, or of an economic or monetary region, is increased. In most modern economies, the money supply is in the form of bank deposits where there is a 20% legal reserve requirement.

Types of Money

Commodity Money

Commodity money is a basic good used in trading/commerce that is interchangeable with other goods of the same type.

Representative Money

Representative money is government-produced money backed by a physical commodity such as precious metals.

Inconvertible Fiat Money

Inconvertible fiat money is a monetary standard under which the fiat money supply cannot be converted into gold, silver, or virtual money by its citizens.

Demand for Money

Demand is the desired/wanted holding of financial assets in the form of money: that is, cash or bank deposits rather than investments.

Functions of Money

Money has three different functions:

1. Medium of Exchange: When money is used to intermediate the exchange of goods and services, it is performing a function as a medium of exchange.
2. Store of Value: Money is the function of an asset that can be saved, recovered, and exchanged at a later time.
3. Standard of Value: Money refers to an agreed-upon medium of exchange.

Variables Affecting Money Demand

Two variables affect money demand:

1. Real Income: Real income is the earnings of individuals or the nation after adjusting for inflation.
2. Opportunity Cost: Opportunity cost is the loss of other alternatives when one alternative is chosen.