Role Of Money In Economy
ROLE OF MONEY IN MACROECONOMICS
1. Introduction
Money buys goods and goods buy money; but goods do not buy goods. −Robert W. Clower (1967).
Money can be seen as the medium of exchange which is acceptable while transaction is being undertaken between two parties. Thus it can be used to buy any good directly, if one goes by the rules. Some of the common forms of money are:
- Commodity money: This is when the value of the good represents its value in terms of money like gold or silver.
- Fiat money: This is when the value of the good is less than the value it represents
- Bank money: It is the accounting credits that can be used
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Accepted mediums of exchange are also known as means of payment which are accepted by the people. Thus money is characterized as a fully liquid asset. A fully liquid asset is one which can be used instantly i.e. real time use, directly, without any extra costs and external restrictions while making payments. Some of the features of money that make it so important for any economy are as follows:
- It eliminates the need of double coincidence, i.e, when both the parties in the transaction want the thing other one is offering. This is a feature of the barter system and primarily why it is deemed to be
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This is not a physical location. When public needs more cash, the demand for bank loans increases, and after being granted this demand the bank reserves are reduced. Thus when the deposits of the banks increase after the first round, automatically then the bank reserves increase as well. In order to maintain their own reserves with the required reserve-deposit ratio, the banks with low liquidity will borrow from the high liquidity banks or other financial institutions. Though money market is narrowly defined, it is very closely related to the terms like the trade in debt-instruments, commercial paper, and treasury bills of one year maturity. Institutions such as the central bank, commercial banks, mortgage credit organizations and life insurance companies also act as the agents trading inside the money market. A term like money market rate is equivalent to the term short term investment
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