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  1. Function of money

  • Medium of exchange. This function solves all the difficulties of barter system. There is no necessity for a double coincidence of wants in the money economy. The difficulty with a barter system is that the order to obtain the particular good and servises from supplier, one has to possess a good of equal value which the supplier also desire (only if there is a double concidence of wants)

  • Money as mesure of value. In money economy values of all commodities are expressed in terms of money. This function of money makes transactions easy and fair.

  • Money as a standard of Deferred Payment. In a money economy the contracts are made for future payments. Terms of money instead of goods and promise to repay the loan in money. In this way money is the standard of deffered payment.

  • Money as a store of value. Goods can not be stored because they are perishable. People recieve their income in money and keep their saivings in money form in banks (store value in commodities)

  1. The supply for money. Money definition.

Money is any object or record, that is generally accepted as payment for goods and services and repayment of debts in a given country

  • M0 = all currency (notes and coins) in circulation

  • M1 = M0+all checkable deposits (bank money), all traveler`s checks

  • M2 = M1+saivings and time deposits held in banks

  • M3 = M2+Large denomination, long term time deposits

In economics, the money supply or money stock, is the total amount of money available in an economy at a particular point in time. Money supply data are recorded and published, usually by the government or the central bank of the country.

  1. The demand for money.

Is affected by several factors including the level of income, intrest rates, and inflation as well as uncertainty about future. There are 3 motives for demanding money:

  • Transactions motive arises from the fact that most thansactions invole an exchange of money. Because it is necessary to have money available for transactions money will be in demanded. The total number of transactions made in an economy tend to increase over time as income rises. Hence, as income or GDP rises, the transactions demand for money also rises.

  • Precautionary motive People often demand money as a precauntion against an uncertain future.

  • Speculative motive. Money as other stores of value is an asset depends on both its rate of return and its opportunity cost (intrest rate, inflation)

  1. Banking system: creating money

Banks receive funds from depositors and in return provide these depositors with a checkable sourse of funds or with intrest payments. Then they use the funds that they receive from depositors to make loans to borrowers that is they serve as middleman in the borrowing and ledding process. When banks receive deposits they don`t keep all of these deposits on hand because they know that depositors willn`t demand all of these deposits at once. The deposits that banks keep on hand are known as bank reserves. The reserve requirement is the fraction of deposits set aside for withdrawal purposes. The level of reserve requarment in setting up by Central Bank. Banks earn profits by borrowing funds from depositors at zero rates of intrest and using these funds to make loan at higher rates of intrest.

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