More about Money
Learning more about money
When we hear the term “money supply” it can be quite difficult to define. It doesn’t just necessarily just mean cash (banknotes and coins).
Money has 4 main functions
Medium of exchange [money can be traded]
Measure of value [the value of something can be measured with money]
Store of value [money can retain its value over time]
A standard of deferred payment [borrowing money to consume something now]
4 other requirements of money:
Portable
Widely accepted
Difficult to forge
Durable
Here are some examples of money:
Coins
Notes
Shares
Bonds
However, different types of money have different levels of liquidity.
Definition of liquidity: how easily something can be spent
Coins and notes can be spent very easily…therefore they are liquid assets.
However, shares cannot be spent easily…they have to be sold for liquid money first (cash), and then that money can be spent. Therefore, shares are illiquid assets.
The money supply can be narrow or broad...
Narrow money: notes and coins in circulation + balances held at the central bank.
Narrow money is very liquid.
Broad money: this is narrow money + other illiquid assets
Therefore, broad money is less liquid than narrow money.
In summary, we have learned:
The functions of money
Examples of money
Liquidity
Money supply
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