Question

Explain the following terms (at least 2-3 sentences per term):

• Legal Tender

• M1

• M2

• Medium of Exchange

• Monetary Aggregate

• Money

• Specialization

• Standard of deferred payment

• Store of Value

• Transactions Costs

• Unit of Account

• Wealth

Do not just copy&paste from textbook; explain in your own words

Answer 1

Legal Tender : Denomination of a country by law, must be accepted as a medium of exchange and payment for money debt. This is the money that is legally valid for the payment of debt and no one cannot refuse to accept it when offered.

M1: It is basically the narrow money supply. It includes currency with the public, demand deposits with the banking system and other deposits with RBI.

M2: It is greater than M1 as it constitutes all the components of M1 and also savings deposits of post office savings banks.

Medium of exchange: Thia is basically the fundamental feature of money which means that money act as a medium of exchange as money can standardized value that can be used to settle the exchange of goods.

Monetary aggregate: They measure the amount of money in the circulation in the economy. M1, M2, M3, M4 are monetary aggregates.

Money: Money can be anything that serves as a medium of exchange, a unit of accounting and a store of value.

Specialization: It basically means to focus on a specific topic rather than its large version to attain efficiency. Like to produce one type of good rather than multiple good so that we can attain efficiency in that single good.

Standard of deferred payment: It is a fundamental function of money. Deferred means payment in future and money provide a standard payment method which was not possible in barter system.

Store of value: It is a fundamental function of money. It means an asset that maintain its value without depreciating.

Transaction cots: It is a cost which occurs while making economic transaction such as exchange of goods and services.

Unit of account: It is a fundamental function of money. It allows comparison and measurement of differents things.

Wealth: Wealth refers to the possession of a large amount of money, assets and other valuable things.