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

  1. Medium of exchange [money can be traded]

  2. Measure of value [the value of something can be measured with money]

  3. Store of value [money can retain its value over time]

  4. A standard of deferred payment [borrowing money to consume something now]

 

4 other requirements of money:

  1. Portable

  2. Widely accepted

  3. Difficult to forge

  4. 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:

  1. The functions of money

  2. Examples of money

  3. Liquidity

  4. Money supply

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