Types of Money (Money and Banking Assignment)
Types of Money (Money and Banking Assignment)
Types of Money (Money and Banking Assignment)
Economists define “Money (also referred to as the money supply) as anything that
is generally accepted in payment for goods or services or in the repayment of
debts”.
Functions of money:
1. Medium of exchange
2. Unit of account
3. Store of Value
Medium of exchange:
In almost all market transactions in our economy, money in the form of currency or
checks is a medium of exchange; it is used to pay for goods and services. The use
of money as a medium of exchange promotes economic efficiency by minimizing
the time spent in exchanging goods and services.
The time spent trying to exchange goods or services is called a transaction cost. In
a barter economy, transaction costs are high because people have to satisfy a
“double coincidence of wants”—they have to find someone who has a good or
service they want and who also wants the good or service they have to offer.
Unit of account:
The second role of money is to provide a unit of account; that is, it is used to mea-
sure value in the economy. We measure the value of goods and services in terms of
money, just as we measure weight in terms of pounds or distance in terms of miles.
Store of Value
Money also functions as a store of value; it is a repository of purchasing power
over time. A store of value is used to save purchasing power from the time income
is received until the time it is spent.
Money is not unique as a store of value; any asset—whether money, stocks, bonds,
land, houses, art, or jewelry—can be used to store wealth. Many such assets have
advantages over money as a store of value: They often pay the owner a higher
interest rate than money, experience price appreciation, and deliver services such
as providing a roof over one’s head. If these assets are a more desirable store of
value than money, why do people hold money at all?
The answer to this question relates to the important economic concept of liquidity,
the relative ease and speed with which an asset can be converted into a medium of
exchange. Liquidity is highly desirable. Money is the most liquid asset of all
because it is the medium of exchange; it does not have to be converted into
anything else to make purchases. Other assets involve transaction costs when they
are converted into money.
1) Commodity Money
2) Fiat Money
3) Checks
4) electronic Payment
5) e-Money
Commodity Money
Fiat Money
Fiat money, paper currency decreed by governments as legal tender (meaning that
legally it must be accepted as payment for debts) but not convertible into
coins or precious metal.
Checks
A check is an instruction from you to your bank to transfer money from your
account to someone else’s account when she deposits the check.
Advantages:
Disadvantages:
Electronic Payment
The development of inexpensive computers and the spread of the Internet now
make it cheap to pay bills electronically now banks provide websites at which you
just log on, make a few clicks, and thereby transmit your payment electronically.
Not only do you save the cost of the stamp, but paying bills becomes (almost) a
pleasure, requiring little effort.
E-Money
Electronic payments technology can substitute not only for checks but also for
cash, in the form of electronic money (or e-money)—money that exists only in
electronic form.
Securities are assets for the person who buys them but liabilities (IOUs or debts)
for the individual or firm that sells (issues) them.
Function of capital market:
The primary role of the capital market is to raise long-term funds for governments,
banks, and corporations while providing a platform for the trading of securities.
Capital markets help to channelize surplus funds from savers to institutions which
then invest them into productive use. Generally, long-term securities take place in
this market. The capital market is bifurcated in two segments, primary market and
secondary market:
1. Stocks
Stocks are equity claims on the net income and assets of a corporation.
2. Mortgages and Mortgage-Backed Securities
Mortgages are loans to households or firms to purchase land, housing, or other real
structures, in which the structure or land itself serves as collateral for the loans.
3. Corporate Bonds
These long-term bonds are issued by corporations with very strong credit ratings.
These long-term debt instruments are issued by the U.S. Treasury to finance the
deficits of the federal government.
These long-term bonds are issued by various government agencies such as Ginnie
Mae, the Federal Farm Credit Bank, and the Tennessee Valley Authority to finance
such items as mortgages, farm loans, or power generating equipment.
, also called municipal bonds, are long-term debt instruments issued by state and
local governments to finance expenditures on schools, roads, and other large
programs.
7. Consumer and Bank Commercial Loans
These loans to consumers and businesses are made principally by banks but, in the
case of consumer loans, also by finance companies
TRADE CYCLE
In trade cycles, there are upward swings and then downward swings in
business. The periods of business prosperity alternate with periods of
adversity. Every boom is followed by a slump, and vice versa. Thus, the trade
cycle simply means the whole course of trade or business activity which passes
through all phases of prosperity and adversity.
Several suggestions have been put forward as to the cause of cycles. The most
well known are developed by Samuelson, Hicks, Goodwin, Phillips and Kalecki
in the 1940s and 1950s, combine the multiplier with the accelerator theory of
investment. More recently, attention has been paid to the effects of shocks to the
economy from technology and taste changes.
Typically economists divide business cycles into two main phases – depression and
recovery. Boom and slump mark the turning points of the cycles:
Then starts the downward course. Fearing that the era of profits has come to
a close, businessmen stop ordering further equipment and materials. The
prudent businessmen want to get out altogether and cut down his
establishment ruthlessly. The government applies the axe mercilessly. The
bankers insist on repayment. The bottlenecks appear, stocks
accumulate. Desire for liquidity all round. This accentuates the depression.