Money and the Money Supply - M0 & M4
EconplusDal・9 minutes read
Money serves as a medium of exchange, store of value, unit of account, and standard of deferred payment, essential for transactions. Inflation can diminish money's value over time, requiring it to be acceptable, portable, durable, divisible, limited in supply, and difficult to counterfeit.
Insights
- Money serves four critical functions: medium of exchange, store of value, unit of account, and standard of deferred payment, ensuring its essential role in economic transactions and stability.
- Understanding the distinctions between commodity money with intrinsic value like gold and fiat money without intrinsic worth, as well as the varying liquidity levels of different forms of money, highlights the complexity and nuances of the monetary system essential for economic operations.
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Recent questions
What are the functions of money?
Money serves as a medium of exchange, store of value, unit of account, and standard of deferred payment.
How does inflation impact money?
Inflation can erode the store of value function of money over time.
What are the characteristics of money?
Money must be acceptable, portable, durable, divisible, limited in supply, and difficult to forge.
What is the difference between commodity money and fiat money?
Commodity money has intrinsic value like gold, while fiat money has no intrinsic value.
What is the money supply composed of?
The money supply includes notes, coins, and deposits in M0, while M4 includes non-cash financial assets that can be easily converted into cash within five years.
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Summary
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Functions and Characteristics of Money
- Money must satisfy four functions: act as a medium of exchange, store of value, unit of account, and standard of deferred payment.
- Inflation can erode the store of value function of money over time.
- Money must be acceptable, portable, durable, divisible, limited in supply, and difficult to forge.
- Commodity money has intrinsic value like gold, while fiat money, like notes and coins, has no intrinsic value.
- Money can vary in liquidity, with cash being the most liquid form, followed by deposits and near money assets like certificates of deposit and bonds.
- The money supply includes notes, coins, and deposits in M0, while M4 includes non-cash financial assets that can be easily converted into cash within five years.
