2. DEFINITION
Money is the stock of assets that can be
readily used to make transactions.
It is a medium of exchange for goods and
services
3. Functions of money
1. Medium of exchange – we use it to buy
things
2. Store of value – transfers purchasing
power from the present to the future
3. Unit of account – the common unit by
which everyone measures prices and
values.
4. Types of money
Fiat money :
Has no intrinsic value
Example: the normal paper currency we use.
Commodity money :
Has intrinsic value
Examples : gold coins, ciggarrettes in prison
5. The money supply and Monetary
Policy
The money supply is the quantity of money
available iin the economy
Monetary Policy is the control over the
money supply.
Monetary policy is conducted by the
CENTRAL BANK.
6. What is Velocity?
It is the rate at which money circulates.
Defined as the number of times the average
naira note changes hands in a given time
period.
V = T/M
V = velocity
T = value of all transactions
M = money supply
7. Inflation and interest rates
Nominal interest rate, i (not adjusted for
inflation)
Real interest rate, r (adjusted for inflation)
r = i - π
8. The Fisher effect
The Fisher equation: i = r + π
Hence an increase in π causes an equal
increase in i.
This one-for-one relationship is called the
Fisher effect.
