MONEY & ECONOMIC POLICY

Money defined
*Hyman defines money as “anything that is generally accepted as payment for goods and services.”
*Money according to Cargill, is “anything used to make payment, for a good, a service or a debt obligation.”
*Kidwell and Peterson take a wider view by declaring that money is “a generally acceptable medium of exchange.” Although this
definition stresses change, it is implied that payment is made to acquire certain object.

The definition of money by various writers points to one important aspect: that money is used to facilitate exchange.

Functions of Money
 As a medium of exchange
 It is used as a standard of value
 Served as a standard for deferred payments
 Serves as a store of value
 Serves as a reserve or a guaranty of solvency
 Serves as objects of gifts on some occasions

Characteristics of Money
 General acceptability
 Portability
 Durability
 Uniformity or Homogeneity
 Divisibility
 Cognizability
 Elasticity of supply
 Stability of value

KINDS OF MONEY
Early forms of money – commodities – commodity money.

Gold & silver – are commodities that possess the most important characteristics of good money. They are wealth in themselves even
when not used as money.

Token money – metal contents of which are worthless than the face value of the coins. It is also called subsidiary money. This
deficiency in value prevents the disappearance of token money from circulation.

Paper money
The greater part of the currency in circulation in most countries consists of paper money. It is easier to store it than to store
metallic money. It is a substitute for precious metals.

Fiat money
Fiat money circulates by authority of the government without any reserve behind it. Fiat money is usually issued during
periods of emergency, as during wartime, or when the government experiences great difficulty in raising enough revenue from the
usual sources in order to meet extraordinary expenditures.

Deposit Currency
Demand deposits in banks constitute an important part of the circulating medium of modern society. Deposit currency is
circulated through the use of checks.

Monetary Supply

- The amount of money in circulation.

General purpose money
M1 = currency in circulation + demand deposits

Broad money
M2 = M1 + Savings and time deposits

Monetary Standard

The monetary standard of a country is provided in the currency law of that country.

The currency law defines the monetary unit with which to make payments and the kinds of money that circulate in the money.

Economic policy
Monetary policy
 The microeconomic policy laid down by the central bank. It involves management with money supply and interest rate and is the
demand side economic policy used by the government of a country to achieve microeconomic objectives.

Fiscal policy
 Measures employed by governments to stabilize the economy specifically by manipulating the levels and allocations of taxes and
government expenditures.