Question

Define the functions of money, identify key properties that money must possess, and explain official definitions of the money supply?

Answer 1

Money supply refers to the total amount of cash or money that is present in an economy or is in supply at a particular point of time. This includes cash, coins and money held in bank accounts by individuals in an economy. Real money would refer to the total the total money after taking into account the level of inflation in the economy.

Some also refer to money as any good that can be or is widely accepted in order to have final payments.

There are 5 major functions that money carries out.

a. Measure of value.

Money is the common platform against which everything is measure. An amount equal to the value of the commodity being purchased can be identified and paid for using money. It is an answer to a common problem faced in the barter system.

b. Store of Value.

Money is not perishable, i.e it can be stored or kept for a longer span of time for future use.

c. Medium of exchange

Money is the common medium of exchange over the world. Though different countries have different currencies, there is an exchange rate between them and thus are accepted globally.

d. Basis of credit.

Money can be used when needed most. People can buy things with money when they actually need it. In the barter system, for trade to take place, people will have to wait until some who had what they wanted would approach them and in return be ready to accept what they have to offer

e. A unit of account.

Since the goods and services are accounted for annually in the form of GDP (gross domestic product), there has to be a common rod in which it is recorded. If it was recorded in terms of goods and services produced, it would become difficult for one to analyse. Here money comes into becoming the common rod or measurement.

  Properties of money would be similar to the functions that they perform. It also includes

a. Durability. Money is something that will last for a longer duration without loosing its value and can be replaced at full value in case of damage

b. Portability. Money can be easily transferred from one place to another and from person to person.

c. Divisibility. A unit of money should be divisible into smaller units of money.

d. Uniformity. Money should be in a few accepted forms. And that form is common. Eg, paper money, coins

Acceptability. Anything that is referred to as money needs to be accepted globally.