Money -- Outline

Most people would like to have more money. Students, however, often fail to understand that the real value of money is determined by the goods and services money can buy. Doubling the amount of money in an economy overnight would not, by itself, make people better off, because there would still be the same amount of goods and services produced and consumed, only at higher prices.
Money is important to an economy because it replaces barter and it makes exchanges less costly. As a result, people are more likely to specialize in what they produce, and then use money to buy whatever they want to consume. This increases the overall level of production and consumption in a nation.

Functions of Money
Money is something which people generally accept in exchange for a good or a service. Money performs four main functions:

* a medium of exchange for buying goods and services: people consume goods and services, not money. Money is useful primarily because it can be used to buy goods and services. Producers use natural resources, human resources and capital goods (not money) to produce goods and services.

* a unit of account for placing a value on goods and services;

* a store of value when saving;

* a standard for deferred payment when calculating loans.

Properties or Characteristics of Money
Any item which is going to serve as money must be:

* acceptable to people as payment;

* scarce and in controlled supply

* stable and able to keep its value

* divisible without any loss of value

* portable and not too heavy to carry.

Money Supply Definitions
The basic money supply in the United States consists of currency, coins and checking account deposits. In many economies, when banks make loans, the money supply increases; when loans are paid off, the money supply decreases.

The money supply is the total amount of assets in circulation which are acceptable in exchange for goods. In modern economies people accept either notes and coins or an increase in their current account as payment. Hence the money supply is made up of cash and bank deposits. In the US, they are M1, M2, M3, L. The money supply is controlled by our central bank, the Federal Reserve System