My Notes Essay

4682 WordsAug 8, 201219 Pages
Unit 3 The Monetary Sector Objectives ● Define money and explain the requirements of money ● Describe the functions of money ● Discuss the functions of a central bank and commercial banks ● Describe the money creation process ● Explain how the supply of money and the demand for money are determined ● explain the instruments of monetary policy Definition of Money Money is anything that is generally acceptable in exchange for goods and services. Barter Economies Barter is the direct exchange of one good for another without using money as medium of exchange. If people want to trade, there has to be a double coincidence of wants. This means there is a need to find a match between what each of the two traders wants to obtain and what each wants to offer in exchange. Barter is a time consuming process and not suitable for a modern economy where a wide range of goods and services are produced. Requirements of Money Objects that we can use as money should meet the following requirements: ● General acceptability: It should be desired and accepted by all as medium of exchange. ● Durability: Money changes hands all the time and therefore it should not wear easily. ● Manageability: Its mass should be small relative to its value, i.e. it must be portable. ● Homogeneity and divisibility: The various denominations of a currency should be made of the same material and look the same. ● Recognisability: It should be easily recognizable and distinguishable from other materials. ● Value: It should be limited in supply because the relative scarcity of a currency determines its value. ● A relatively fixed value: Its value should be fairly constant. Money loses its value and purchasing power due to inflation. Functions of Money Money has several basic functions in the economy. These functions distinguish money from other assets such as stocks and bonds. ●

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