MONEYMoney is any good that is widely used andaccepted in transactions involving the transferof goods and services from one person toanother.-medium of exchange
4EVOLUTION OF MONEY Commodity money: Gold, Silver, other preciousmetals, certain stones, Cigarettes, etc. Representative money that is backed 100 % by preciousmetals. Fiat money: No consumption or investment use: intrinsicallyuseless pieces of paper. Checks e- money & plastic money
CHARACTERISTICS OF MONEYi. Durabilityii. Divisibilityiii. Transportabilityiv. Non counterfeit abilityv. Limited supplyvi. Acceptability
1. DURABILITY• Item retains the same shape, form, andsubstance over an extended period of time• It does not easily decompose, deteriorate,degrade, or otherwise change form.• Durability also extends beyond the physicalrealm to include social and institutionaldurability.
2. DIVISIBILITY• Means money can be divided into smallincrements that can be used in exchange forgoods of varying values.• For an item to function as the medium ofexchange, which can be used to purchase awide range of different goods with a widerange of different values, then it must bedivisible. The smaller the divisions, the better.
3. TRANSPORTABILITY• Means that money can be easily moved fromone location to another when such movementis needed to complete exchanges.• The money must be transportable. Money thatis NOT transportable is not transported, so it isnot used.
4. NON COUNTERFEIT ABILITY• Means that money cannot be easily duplicated.• A given item cannot function as a medium ofexchange if everyone is able to "print up," or"make up" a batch of money any time that theywant.
5. LIMITED SUPPLY• Means that restriction on the amount of moneyin circulation• Respective country’s Government has theresponsibility to control/maintain an adequatemoney supply to the market based on theirmonetary policies.
6. ACCEPTABILITY• Acceptability means that everyone must beable to use the money for transactions.• Money is universally accepted anywhere in theworld as a universal mean for transaction.
TYPES OF MONEY1. Commodity money2. Fiat money3. Bank money
1. COMMODITY MONEY• Commodity money is a good whose valueserves as the value of money• Gold coins are an example of commoditymoney.• Commodity money has been replaced with fiatmoney.
2. FIAT MONEY• Fiat money is a good, thevalue of which is less thanthe value it represents asmoney.• Currency are an exampleof fiat money because theirvalue as slips of printedpaper is less than theirvalue as money.
3. BANK MONEY• Bank money consists of the book credit thatbanks extend to their depositors.• Transactions made using checks drawn ondeposits held at banks involve the use of bankmoney.• example:- DD, Checks, credit & debit cards
PLASTIC MONEY• Plastic money is a term that is used inreference to the hard plastic cards we useeveryday in place of actual bank notes.• Different forms such as cash cards, creditcards, debit cards, pre-paid cash cards, storecards, etc.
FUNCTIONS OF MONEYi. Money as a unit of valueii. Medium of exchangeiii. Standard of deferred paymentsiv. Store of value
1. MONEY AS A UNIT OF VALUE• Money measures the value of various goodsand services which are produced in aneconomy.• Money works as unit of value or standard ofvalue.• Money works as common measure of value byexpressing exchange value of all goods andservices in money in the exchange market.
2. MEDIUM OF EXCHANGE• Money facilitates transactions of goods andservice as a medium of exchange.• Eg; Producers sell their goods to thewholesalers in exchange of money.Wholesalers sell the same goods to theconsumers in exchange of money.
3. STANDARD OF DEFERRED PAYMENTS• Modem economic setup is based on credit andcredit is paid in the form of money only.• Money, besides being the basis of currenttransactions, is also the basis of deferredpayments.• Only money is such a commodity in whoseform accounts of deferred payments can bemaintained in such a way so that both creditorsand debtors do not stand to lose.
4. STORE OF VALUE:• It was virtually impossible to store surplus valueunder barter economy; the discovery of moneyhas removed this difficulty.• With the help of money, people can store surpluspur-chasing power and use it whenever they want.• Saving in money is not only secure but itspossibility of being destroyed is very less.Besides, it can be used whenever needed.• Money has become the only basis of promotingcapital formation.
THE DEMAND FOR MONEY• The demand for money is affected by severalfactors,– The level of income– Interest rates– Inflation– Uncertainty about the future.• The way in which these factors affect moneydemand is usually explained in terms of thethree motives for demanding money:I. The transactionsII. The precautionaryIII. The speculative motives
1. TRANSACTIONS MOTIVE• The transactions motive for demanding moneyarises from the fact that most transactionsinvolve an exchange of money. Because it isnecessary to have money available fortransactions, money will be demanded.• The total number of transactions made in aneconomy tends to increase over time as incomerises. Hence, as income or GDP rises,the transactions demand for money also rises.
2. PRECAUTIONARY MOTIVE.• People often demand money asa precaution against an uncertain future.• Unexpected expenses, such as medical or carrepair bills, often require immediatepayment. The need to have money available insuch situations is referred to asthe precautionary motive for demandingmoney.
3. SPECULATIVE MOTIVE.• Money, like other stores of value, is an asset. Thedemand for an asset depends on both its rate ofreturn and its opportunity cost.• Typically, money holdings provide no rate of return andoften depreciate in value due to inflation. Theopportunity cost of holding money is the interest ratethat can be earned by lending or investing ones moneyholdings.• The speculative motive for demanding money arises insituations where holding money is perceived to be lessrisky than the alternative of lending the money orinvesting it in some other asset.
SUPPLY OF MONEY• The money supply of a country consistsof currency (banknotes and coins) and bankmoney (the balance held in checkingaccounts and savings accounts).• Bank money, which consists only of records(mostly computerized in modernbanking), forms by far the largest part of themoney supply in developed nations
M1, M2, M3• M1, M2, M3 are all measures of moneysupply, the amount of money in circulation at agiven time.M1, also called narrow money, normally includecoins and notes in circulation and other moneyequivalents that are easily convertible into cash.M2 is somewhat broader measure of the supply ofmoney, which includes all of M1plus savings and time deposits held at banks.M3 is an even broader measure of the moneysupply, which includes all of M2 plus largedenomination, long-term time
• M1 being the narrowest measure and M3 beingthe broadest.• Narrow money refers to forms of money thatare available immediately for use intransactions,• Broad those that are not immediately available.