What Is Money Essay Research Paper What

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What Is Money? Essay, Research Paper What is ?money?? How is the supply of money affected by the aims and the actions of the commercial banks, the central bank, and the government?s financing of the PSBR?The Concise Oxford Dictionary defines money as ?a current medium of exchange?. This definition, if rather sparse, does detail the essential nature of money: it is a recognised form of exchange for goods and services. It can take many forms: anything which is accepted by the seller, because it has a recognised value which can be used to purchase further goods and services, will suffice as money. Why money exists, even in centrally planned economies, is because it is efficient. A barter economy, in which no money was used, requires those wishing to make a transaction to

exchange goods and services. The complexities involved in such a system are immense. For example, an apple seller, wishing to obtain a hammer, would not only have to find a toolmaker wishing to obtain apples, but would also need to make an agreement regarding the appropriate apples/hammer exchange rate. The former problem is known by economists as a ?double coincidence of wants?, whilst the latter demonstrates the hassle of having to know relative prices, not only for apples and hammers, but also for every other good or service in the market. If, however, one good becomes the numeraire good, and the value of every other good or service was measured in relation to it, transactions will be made much more easily. This numeraire good would become the money of the economy. To be

effective, money will have to fulfil some or, preferably, all of the following. It must be accepted as a unit of account and a means of exchange or payment, be durable, scarce, easily dividable, and stable in value. In modern societies, coins and notes (token money) are obvious forms of money, but money, and the money supply, takes on more forms than just these. Hard currency, such as notes and coins, are considered the most liquid monetary asset there is, as it can quickly be turned into money. Its liquidity is very convenient, but it does not hold its value as well as other assets, as not only does it not earn interest, but also its real value will drop during periods of inflation. ?1 is still ?1 after a period of time, but due to inflation its purchasing power will be less.

Less liquid assets earn interest and thus are not as affected as money is by inflation, although they are harder to convert to money. It can be argued that sight deposits, which are instant access chequing accounts, are only slightly less liquid than money, as cheques are accepted as a form of payment. Wealth need not be only stored in money, but in other, less liquid assets. The amount of money in an economy is a necessary tool for fiscal policy, and thus it is necessary to know how it can be calculated. The supply of money is the stock of liquid assets in an economy which can be exchanged for goods or services. It is not simply the number of notes, coins, and deposits of banks held at the central bank). This has a number of names: it may be called the monetary base,

high-powered money, M0, or narrow money. This definition of the money supply is rather limited, being not much more than a mere description of how much token money is in circulation and how much is lodged at the central bank. Although other, wider definitions are used, known as broad money, the most common one is M4. This covers all that M0 does, but also non-interest-bearing bank deposits, other bank retail deposits, retail shares and deposits at building societies, and wholesale deposits (including certificates of deposits) at banks and building societies. It has been argued that the simple summing of M4 to estimate the money supply takes account neither of the liquidity of the various assets nor of their differing abilities to earn interest. M4, it is said, erroneously