The role of money in an economy Cheat Sheet (DRAFT) by nelaorav

to exchange for those Gs & Ss we wach need and want but are unable to produce for ourselves

community that practised specia­liz­ation was able to produce more than enough food, clothes, pots, etc.

was not a first form of money, because the value couldn't be measured fairly

fixing a rate of exchange - the value of each good had to be expressed in the value of another one

trying to save for later usage - you can't store Gs for later usage as many of them can go bad

medium of exchange - is generally accepted for all Gs & Ss and we don't have to search for someone who is willing to trade with us

store of value - it can't go bad (only inflation can make it lose value)

is generally acceptable medium of exchange

precious metals - gold or silver which were scarce enough but harder to divide

paper money - people with money saved them at goldsm­ith's and in return they were given the paper receipt stating their value, later goldsmiths realized that they could issue papers with much more money than they have since nobody is depositing them

it encourages specia­liz­ation by making trade easier which results in increased national output and income and standard of living

deposits in banks can be converted back into cash so the bankers must ensure they have enough cash to do so

the remaining money can be used to lend to other clients and so does the list go on and on since when someone buys something the seller does the same with his profit

a certain percentage of money from deposits

the higher the reserve requir­ement the tighter the money supply - which leads to lower multiplier effect

financial assets can be though of as near money

to sum up some assets are nearer money than other because some assets fulfill the funcions of money better than other, som assets can be converted into cash quicker than other and some retain their value on conversion to cash better than other

VoC is the number of times notes and coins are exchanged or circulate in an economy each year, the higher the VoC the lower the SoM needs to be

M = SoM, V = VoC, P = price lvl, Y = real GDP (P*Y = the nominal GDP)

are defini­tions of what money is, there are two groups of money aggregated in GB

M4 is a wider definition of what money is, it contains money as a medium of exchange as well as store of value - cash, savings in banks and savings in other financial instit­utions such as building societies

is the price of money

is made up of different parts (banks, other financial instit­utions - insurance companies, etc.) and it provides crucial services which keep the economy moving (payments, borrowing, saving, risk manage­ment)

business organi­zations that specialize in providing financial services (borrowing money, making invest­ments, exchanging the money, etc.)

a banks is a financial interm­ediary because they bring clients who want to save money and clients who want to borrow money

charge fees for the provision of other financial services (withd­rawls from ATMs, exchanging and transf­erring foreign currency, etc.)

is the centre of the banking system in most economies

when people or organi­zations buy gov. securities they will take money from their bank account and so reduce deposits available to lend by the banks to private sector - so selling gov. sec. to private sector reduces the SoM, when the CB purchases the gov. sec. it increases the SoM

this reduces the amount of money banks have available to lend to its clients

this invloves using newly created money to buy up financial assets held by banks (gov. or corporate bonds)