13- The Evolution, Characteristics & Functions of Money

Question 1

Result of more money but not an increase in output?

Answer 1

Inflation

Question 2

Nature of money

Answer 2

• A stock
• Money supply is a nominal value measured in money units.

Question 3

Functions of money

Answer 3

• Medium of exchange
• Store of value
• Unit of account

Question 4

Medium of exchange characteristics

Answer 4

• With barter- double coincidence of wants needed
• Money makes possible specialisation and division of labour due to facilitating transactions which improves efficiency in the economy.
• Needs to readily acceptable, have known value, be difficult to counterfeit and be divisible.

Question 5

Store of value characteristics

Answer 5

• Money a convinient way to store purchasing power
• To be good store of value, money value must be relatively stable
• Variable price level reduces usefulness of money as store of value.

Question 6

Unit of account characteristics

Answer 6

• Used for accounting purposes.
• Money can be used as a form of deferred payment
• Money’s use as a unit of account can be harmed significantly by inflation.

Question 7

Fiat money

Answer 7

Satisifies all functions of money
Declared legal tender by governments

Question 8

Role of central banks in money supply

Answer 8

Over time, central banks have assumed a monopoly in the provision of legal tender in the economy.
Central banks are responsible in determining the value of a country’s currency.

Question 9

How fiat money was created

Answer 9

Gold standard was abandoned

Question 10

Other types of money

Answer 10

Deposits at banks, credit unions, savings banks, and savings and loan associations

Question 11

Why are deposits money?

Answer 11

Highly liquid

Question 12

How does money get into the economy?

Answer 12

• Once countries left the gold standard, central banks no longer put money in circulation in return for gold received.
• Central banks buy gov bonds and pay with money in the form of gov deposits, which are put into circulation when the gov pays it bills with these deposits.
• Central bank has direct control over higher powered money, the cash and monetary base.

Question 13

Near money

Answer 13

Commodities which fulfil only some of the functions of money cannot be classed as money.
▶ Credit cards and luncheon vouchers

Question 14

Notes and coins

Answer 14

This measure refers to all the currency in circulation outside the Bank of England.

Question 15

Retail M4

Answer 15

This encompasses UK non-bank and non-building society holdings of notes and coins, plus sterling retail deposits with UK banks and building societies.

Question 16

M4

Answer 16

M4 is retail M4 plus all other private sector sterling interest bearing deposits at banks and building societies, plus sterling certificates of deposit (and other paper issued by banks and building societies of not more than five years’ original maturity).