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Money has 4 four basic function namely according to the AmosWeb: 1) medium of exchange, 2) Unit of account, 3) Store of value and 4) Standard of deferred payment (Amosweb, 2012). It is my opinion that in this regard the most important function of money is that money is a medium of exchange. The primary function of money is to act as the medium of exchange. Individuals uses money to buy and sell goods. Buyers give up money and receive goods. Sellers on the other hand give up good and receive money. If we did not have have money it will be more like we are in a barter economy where one good is traded directly for another. They key to successful barter is trade is according to the Amos website is that each trader has to want what the other traders has (Amosweb, 2012). Without this the economy becomes inefficient. Traders spend more time seeking trades and less time producing goods. If we take an example: Suppose Jessica Hall heads into town with a basket full of hand-crafted hats which she hope to trade for a pair of Levi pants. If the local Levi tailor needs a hat than there would be a double coincidence of want and they are ready to trade, however if the tailor has no desire to have the hat then there is not a double coincidence of wants and Jessica will not get her Levi’s. So now Jessica will have to spend a great deal of time looking for someone else that has got a good the tailor wants. The
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In order to explain the link between inflation and the money supply, economists use what's called the quantity theory of money. It centers on the Quantity Equation. This basically says that economic output (gross domestic product) is equal to how big the money supply is, this is multiplied by the velocity of money, which is how many times the same dollar gets spend throughout the year. Real GDP is equal to how big the money supply is I multiplied by the velocity of money. In macroeconomics it boils down to that the money supply times the velocity of money is equal to the price level times the nominal GDP. For example: suppose your price level is 1, while nominal output is $200. The money supply is $100. When using the above formula basically it means that the average dollar bill in circulation is getting spent two times during the year because if you work out the velocity it comes to 2. Another way of looking at this is that money is turning over at a rate of two times per year. If the central bank decides to doubles the money supply from 100 to 200 dollars while the nominal GDP and the velocity of money stay the same it would mean that the price level will now double. When the central bank increased the money supply by 100
In order to explain the link between inflation and the money supply, economists use what's called the quantity theory of money. It centers on the Quantity Equation. This basically says that economic output (gross domestic product) is equal to how big the money supply is, this is multiplied by the velocity of money, which is how many times the same dollar gets spend throughout the year. Real GDP is equal to how big the money supply is I multiplied by the velocity of money. In macroeconomics it boils down to that the money supply times the velocity of money is equal to the price level times the nominal GDP. For example: suppose your price level is 1, while nominal output is $200. The money supply is $100. When using the above formula basically it means that the average dollar bill in circulation is getting spent two times during the year because if you work out the velocity it comes to 2. Another way of looking at this is that money is turning over at a rate of two times per year. If the central bank decides to doubles the money supply from 100 to 200 dollars while the nominal GDP and the velocity of money stay the same it would mean that the price level will now double. When the central bank increased the money supply by 100