Role Of Money In Macroeconomics

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ROLE OF MONEY IN MACROECONOMICS 1. Introduction Money can be seen as the medium of exchange which is acceptable while transaction is being undertaken between two parties. 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 by the depositor Money serves a variety of crucial functions in the economy and this is why it has gained an unparalleled influence in the matters of economy at micro as well as macro levels. Some of the features of money that make it so important for any economy are as follows:…show more content…
The government, money and macroeconomics Macroeconomics is said to be a typical public good as it deals with the economy on a wider scale. The components of macro economy are neither divisible nor exclusive as even the non contributors of the cost of creating the public good are equally liable to use it. Pubic goods and services do not follow the laws of market exchange and since their consumption is indivisible neither the users can be forced to pay for them nor the legal owners have the right to charge for their consumption. Stabilizing the economy is a typical public good that is the sole responsibility of the government in terms of gathering the wide information and the depth of it so as to devise policies best suitable to the economy. Also, the benefits of the public good are enjoyed by all. The producers are able to better plan their production and consumers know when to buy. Macroeconomic variables act as indicators of the current trends of the economy like inflation or recession and anticipate their future trends. Some of the indicators of macroeconomics are as…show more content…
The government decides on the exchange rates depending on different variables and priorities of the government. Other countries like USA and Britain allow full convertibility of their currencies and hence the value of the currencies is determined by market forces and is a greater reflection of the health of the economy. The central banks use Open Market Operations to buy or sell currencies in the open market to stabilize the value of their currency in the currency market. This has a bearing on the exports and imports of the country and hence the overall competency of the country. Interbank Interest Rates: In any economy there are a number of commercial banks providing commercial banking services while the central bank is responsible for regulating the banking sector to keep the economy stable. The interbank interest rate is the cost of borrowing funds between the banks, i.e, when the banks borrow from the central bank or vise versa. These rates determine the relative attractiveness for the banks to park their funds with the central banks or encourage borrowing among the investors by lowering their borrowing

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