QUESTION 2
2.1 Discuss the THREE key functions of money in an economy.
Mohr P. and associates, (2015), indicates that money serves as an important part of our everyday life. Money is any good that is widely accepted in exchange of goods and services, as well as payment of debts. The 3 Key functions of money in an economy can be described as follows:
1. Medium of exchange can be defined as money that is used for buying and selling goods and services and if there was no money, goods would have to be exchanged through the process of barter economy. Barter economy is when goods would be traded for other goods in transactions arranged on the basis of mutual need. e.g. When I raise pigs and want to buy chickens, I would have to find a person …show more content…
Store of value is also money and in order to be a medium of exchange, money must hold its value over time; that is, it must be a store of value. If money could not be stored for some period of time and still remain valuable in exchange, it would not solve the double coincidence of wants problem and therefore would not be seen as a medium of exchange. Money may not be the best store of value because it depreciates with inflation. Money is however more liquid in which wealth can be kept because as a medium of exchange, it is readily accepted everywhere and it can be easily transported and is available in a number of convenient …show more content…
All members of the economy would need to hold money as a form of medium of exchange because if there is no money it will not be possible to perform any transactions. The need to hold money arises because member’s payments and receipts of money do not happen together. e.g. purchases of goods and services happen more frequently whereas wages and salaries are paid either weekly or monthly. This is why workers need to hold money to buy food and other goods between paydays. Money transactions will depend on the total value of the concerned transaction and the level of income that the workers receive. At the macro or aggregate level, the total income in the economy is dependent on the transfer actions demand for money.
The second motive for the demand for money is both interesting and complicated. It is a spectacular motive in the sense that it is related to money as a store value. The observation the remarkable demand for money was Keynes most important contribution to monetary economics. To understand this remarkable demand, one must consider the choice between holding money (which earns very little or no interest at all) and holding bonds (which earn interest). Holding financial assets in the form of money or bonds is dependent on the interest
2.1 Discuss the THREE key functions of money in an economy.
Mohr P. and associates, (2015), indicates that money serves as an important part of our everyday life. Money is any good that is widely accepted in exchange of goods and services, as well as payment of debts. The 3 Key functions of money in an economy can be described as follows:
1. Medium of exchange can be defined as money that is used for buying and selling goods and services and if there was no money, goods would have to be exchanged through the process of barter economy. Barter economy is when goods would be traded for other goods in transactions arranged on the basis of mutual need. e.g. When I raise pigs and want to buy chickens, I would have to find a person …show more content…
Store of value is also money and in order to be a medium of exchange, money must hold its value over time; that is, it must be a store of value. If money could not be stored for some period of time and still remain valuable in exchange, it would not solve the double coincidence of wants problem and therefore would not be seen as a medium of exchange. Money may not be the best store of value because it depreciates with inflation. Money is however more liquid in which wealth can be kept because as a medium of exchange, it is readily accepted everywhere and it can be easily transported and is available in a number of convenient …show more content…
All members of the economy would need to hold money as a form of medium of exchange because if there is no money it will not be possible to perform any transactions. The need to hold money arises because member’s payments and receipts of money do not happen together. e.g. purchases of goods and services happen more frequently whereas wages and salaries are paid either weekly or monthly. This is why workers need to hold money to buy food and other goods between paydays. Money transactions will depend on the total value of the concerned transaction and the level of income that the workers receive. At the macro or aggregate level, the total income in the economy is dependent on the transfer actions demand for money.
The second motive for the demand for money is both interesting and complicated. It is a spectacular motive in the sense that it is related to money as a store value. The observation the remarkable demand for money was Keynes most important contribution to monetary economics. To understand this remarkable demand, one must consider the choice between holding money (which earns very little or no interest at all) and holding bonds (which earn interest). Holding financial assets in the form of money or bonds is dependent on the interest