L16 - Characteristics of Money Flashcards
What are the functions of Money?
- Medium of Exchange
- Means of storing wealth
- Means of establishing value of future claims and
payments (Means of differed payment)
What is meant by the medium of exchange?
- money facilitates selling and buying of outputs and
services.
This leads to specialisation and division of labour that will in turn result in higher productivity and efficiency of an economy
What is meant by means of establishing value of future claims and payments?
- Money can be used for accounting purposes.
Its ability to serve as a means of establishing value for future payments can be threaten in an inflationary environment.
What is the history of Money during BC?
- 1792- 1750 BC: Money and banking originates in
Babylonia. The Code of Hammurabi includes laws
governing banking operations - all carved in stone - 1200 BC: Chinese being using Cowries as money
- 640- 630 BC:
The earliest coins made in Lydia, Asia Minor, consisted
of electrum, (natural combination) of gold and silver.
Athens issues bronze and silver coins.
What is the history of Money during AD?
- 250 AD:
Nero debases the gold and silver coinages. Twenty
years later, the silver content of Roman coins has
fallen to only 4%. - 270 AD:
Aurelian issues new, nearly pure coins, using gold
from his eastern conquests.
He raises the coins nominal value by 2 1/2 times
hoping in this way to stay ahead of inflation.
This “reform” sends inflation soaring. - 1542-1551: The Great Debasement
Henry VIII debases the coinage of England as a
means of raising revenue. - 1560: Elizabeth I begins the reform of England’s
debased coinage
Thomas Gresham, after whom Gresham’s law (“bad
money drives out good”) is named, is an influential
adviser.
The debased coins are recalled and melted down and
the base and precious metals separated (since metal
worth more than the coin)
When was paper money introduced in Europe?
In 1660s, goldsmith’s notes are accepted as evidence of ability to pay.
Mark the first use of Banknotes in England
When was the first US dollar introduced?
To finance the Revolutionary War, the congress issued
Continentals.
Due to oversupply, they rapidly became worthless.
What is fiat money?
It’s money in the world today.
It’s just object that are declared as money due to the law.
What is the monetary base?
Notes and coins in any form.
Also known as Narrow Money
What is Currency?
Notes and Coins.
Notes are money because the government declares them to be with the words printed on every pound.
How is Deposits considered money?
Because they can be converted into currency
on demand and are used directly to make payments.
How does money get into the economy?
Central banks create the monetary base or high-powered money which is made up of notes and coins and bankers deposits at the central bank.
Banks create deposit money by expanding loans and deposits
What is Near Money?
Commodities which only fulfil some of the functions of money but cannot be classified as money.
i.e credit cards and lunch vouchers
- Sometimes used for medium of exchange for
transactions. But may not be able to fulfil other
functions.
How do you define liquid assets?
Those assets which can easily be converted into money without loss of value.
- Can be referred as Near Money
What assets can be classified as liquid?
Time deposits
Treasury and commercial bills
Certificates of deposit.
Others become more liquid as their maturity date is nearer.
