Money

Money is defined as anything that is widely accepted as a medium of exchange while also serving as a unit of measurement and a store of value. There are three functions of money: 1. Primary function i.e money is used as a medium of exchange and it is the measure of value.

2. Secondary function of money i.e.  It is the standard of deferred payments, the transfer, and store of value.
3. Contingent function i.e.  The distribution of national income, maximum profit to the producers, and maximum satisfaction to the consumers, basis of credit and liquidity.

What is money?

Money is the ability to buy things(purchasing power). Money is an economic unit that serves as a universally accepted means of trade in a transactional economy. Money serves as a means of reducing transaction costs, particularly the two-fold coincidence of desires.  Money begins as a commodity with a physical quality that allows market players to use it as a means of trade. Market-determined legal tender or fiat money, money substitutes, fiduciary media, and electronic cryptocurrencies are all examples of money.

Basic understanding of money 

Different economists have defined money in different ways. Some definitions are very broad, while others are overly specific. Walker’s definition, for example, is far too broad. “Money is what money does,” he says. According to him, money is anything that performs the function of money.  so we can conclude that money is not only limited to metallic coins or currency notes. It also includes bills of exchange, cheques, etc. because they all fulfill the need for money or we can say they all are purchasing power. 

According to Robertson money “Money is a commodity that is used to denote anything which is widely accepted in payment for goods or in the discharge of other business obligations”. Now according to this, we can say that money is only limited to metallic coins. This definition narrow downs the field of money. 

Money is a liquid asset that is used to settle transactions.. It operates on the basis of widespread acceptance of its worth both within a governmental economy and across international borders via foreign exchange.

 The current worth of monetary currency is not always determined by the resources employed in its production. Instead, value is formed from the desire to accept and rely on a displayed value in future interactions. 

Money’s fundamental function is to serve as a universally recognized medium of exchange that people and global economies plan to keep and accept as payment for current and future transactions.

Features of money 

A currency should be 1) fungible, 2) durable, 3) portable, 4) identifiable, and 5) stable in order to be most useful as money. These features ensure that the benefit of lowering or eliminating the transaction cost of the double coincidence of demands is not offset by other transaction costs connected with that particular product.

Demand for money and supply of money 

Demand 

The demand for money explains why people want a specific amount of money. Because money is required to perform transactions, the value of those transactions will decide how much money people want to keep: the greater the number of transactions to be completed, the greater the amount of money desired.

Because the number of transactions to be performed is determined by income, it should be obvious that an increase in income will result in an increase in money demand.

 Also, when people maintain their savings in the form of money rather than depositing it in a bank, the amount of money they keep is determined by the rate of interest. 

People grow less interested in retaining money when interest rates rise, because holding money equates to holding fewer interest-earning accounts, and thus receiving less return.

As a result, as interest rates rise, the amount of money demanded decreases.

Supply 

Money in a modern economy consists of cash and bank deposits.

There are a variety of money measures depending on which sorts of bank deposits are included. These are produced by a system that consists of two sorts of institutions: the economy’s central bank and the commercial banking sector.

Creation of money by banks 

Banks are able to lend because they do not expect all depositors to withdraw their funds at the same time. When a bank lends money to someone, it creates a new deposit in that person’s name. As a result, the money supply expands to include both old and new deposits (plus currency.)

Assets and reserves 

Assets are things that a company has or can claim from others. Apart from buildings, furnishings, and other assets, a bank’s assets are public loans. When a bank gives a person a loan of Rs 100, this represents the bank’s claim on that individual for that amount. 

Reserves are another asset that a bank holds. Reserves are deposits held by commercial banks with the Reserve Bank of India (RBI), as well as its cash. These reserves are stored partially in cash and partly in the form of financial instruments issued by the RBI (bonds and treasury bills). Reserves are analogous to the bank deposits we make. We hold deposits, which are our assets and can be withdrawn at any time.

Assets = Reserves + Loans

Conclusion 

Money serves as a medium of exchange, allowing people to receive the goods and services they require. Money, like gold and other precious metals, has value because it is a matter of social standing for the majority of people. Barter Exchange is the exchange of goods without the use of money as a medium of exchange.

It is hampered by a lack of double coincidence of desires. The money supports transactions by serving as a universally accepted medium of exchange. People store money in a modern economy for one of two reasons: transactional or speculative.

Money supply, on the other hand, is made up of currency notes and coins, commercial bank demand and time deposits, and so on. According to the decreasing order of liquidity, it is categorized as narrow or broad money.