Functions of money

1. Medium of Exchange:-

something that is generally

accepted as payment for goods and services

When we say payment for goods we are meaning the seller

of a product will not hold a claim on a payee who have just handled over a money.
This function promotes economic efficiency by

minimizing the time spent in exchanging goods and services

Allowing people to specialize in what they do best
Avoiding the problem of double coincidence by decomposing the single transaction of barter in to two separate transactions of sale & purchase

Allowing freedom of choice

Functions of money
Unit of Account:- it is the liberty to measure values in an economy in terms of money.
Money enables an orderly pricing system which is essential

for: Rational economic calculation and choice

Transmitting economic information among individuals

Furthermore this function of money deletes the problem of

many price in barter.

Functions of money

Store of Value:- The accumulation of wealth by holding dollars or other assets that can be used to buy goods and

services in the future.

It allows values to stored easily. There are other assets that can be most preferred to store values for future trade but money came a head because it is the most liquid.

has no transaction cost since it is used directly in exchange.

the risk one face by storing values through money is a deprecation it value during hyperinflation.

1.3 Evolution of money

Motives for innovation of money Inefficiency of barter self-sufficient society Draw back of autarky.. Society no grew enough

economically ..incentive to identify that most people

will generally accept as a medium of exchange. brought them to commodity money. a good used as money and that has also value And this

independent of its use as money

Evolution of money

Good examples for CM are

animal skins like deerskin

Amole Chew in Ethiopia

Different kinds of precious metals around the world including Ethiopia in the time of Axum The basic feature of CM is its intrinsic value Downside of CM Using a good which have an intrinsic value for a purpose which does not make use of the value. They can become very heavy i.e. hard to transport.

Evolution of money
Fiat money :- is such as paper currency that has no use value apart from it use as money and not backed by gold or other precious metals.
Have no intrinsic value People accept fiat money because of its legal tender i.e. a

government designation that currency is accepted as a repayment

of tax, must be accepted by individuals and firms in a payment of debt.
Seignorage:- is the difference between the value of the good

such a money purchase and the smaller cost of printing this money ( a profit made by the issuing authority when it produce

currency).

Evolution of money

Drawbacks
Easily stolen Expensive to transport when a large deal is closed Needed a huge amount of money( paper money) is needed to

settle it.

Evolution of money

Checks:- are an instruction from you to your bank to transfer money from your account to someone elses account when she

deposits the check.

Or it can be A promise to pay on demand money deposited with

a bank or other financial institution.

To have a check book you need checkable deposit in a bank.

Advantages of check
Reduces the transportation costs associated with the payments

system
Improves economic efficiency

Evolution of money

They can be written for any amount up to the balance in the

account
Making transaction for large amounts much easier Loss from theft is greatly reduced Provide convenient receipts for purchases

Pitfalls Basically the do have two drawbacks

Takes time to get checks from one place to another (if the payee

and the payer are in different locations)

It takes several business days before a bank will allow you to make

use of the funds from a check that you have deposited

Evolution of money

Other new forms of money

Electronic payment = substitute for check

E-money = substitute for cash

Can be debit cards like ATM example MaterCard and visa

cards
What is the difference between credit card and debit cards?
Advanced form of E-money is standard-value card the best

example is smart card.

Measurements of money
After several years of development of the payment system

central banks around the world have arrived a sense of measuring money in the following aggregates:1) M1 is narrowest measure of money that the CB reports It includes currency checking account deposits, and

travelers checks and other checkable deposit.

this are the most liquid form of money i.e. they can directly

be used in transactions.
NOTE: non-interest bearing checking account deposits

called demand deposits,

Measurements of money
2) M2 = it is broader measure of the money supply than M1 And it incorporate M1 plus

Small-denomination time deposits and repurchase agreements

Savings deposits and money market deposit accounts Money market mutual fund shares (no institutional)

They can be turned into cash quickly at very little cost. Some uses also M3 which is M2 plus Large-denomination time

deposits, repurchase agreements and Money market mutual fund shares (institutional).

In general two pragmatic means could be uses to define the money supply of particular country.

1.

The definition utilized should depend on the particular

problem being studied

Example: if an analysis of the effect of the money supply on economic activity is being undertaken, the appropriate definition of money supply is the one that provides the best statistical results. If m, is statistically predictable than m2,monetary policy should be couched in terms of that narrow definition.

2. A method of identifying a break in the spectrum of assets

to separate money. If the substitutability b/n DD and TD is lower than that between TD and other liquid assets, then the definition of money should be limited to currency and demand deposits.