> 428 Types of Money Over time, three types of money have evolved. These are 1. Commodity money 2. Representativ 3. Fiat money ions which follow. These three types of money are now considered in the sect Commodity Money to Representative Money has precious metals, salt, large stones, shells an even cigaretes fulfilled the role of money! This form of money is known as ‘commodity money’ as it derives igs worth from the underlying value of the physical commodity from sre to made. In ouher words, commodity money has feal or incrinsic value. Although commodity money is more convenient than barter it can Prove 1 be inconvenient a x radium of exchange ora standard of deferred payment duc co transporsaion and storage concerns. “eins sult of these concems, representative money evolved. Representative mone; eso mney tet cca ae et ok pene eee be exchanged for a fixed {quantity of commodity suchas gold or silver or any other commodity. The token or paper seat has no intrinsic value but instead i a representation ofthe value of the commod- » be exchanged for. In ths case, the holder of representative money is under omic value as if he or she is holding he or she possesses the same econ the physical commodity itself, Thi began around the middle ages and lasted till the 1970 Under shis system, a unit of currency such as US$1 represenced a fixed amount of gold. rant all money issued by the Central Banks of various countries was backed entirely by 2° equivalent of gold. During early civilization, many objects suc! iy that i cal the perception that Fiat Money Since the era of the 1970s, money issued by Central Banks commodity money nor representative money but rather fiat mon rency is money which, unlike commodity money, has no intrinsic sentative money, is not backed by any physical commodity. Despite this. s acceptable in settlement of a debt because the government declares it as legal is, fiat money fulfils the functions of money, as the government officially stipe! must be accepted in settlement of a debt. of various counties is net! cy. Fiat money of fat 4" value and, unlike °° such money 8S cendet. Lares chat ieee cigarette In post-war Germany, cigarettes became used tfenefeomendaymeny nese used asa form of commodity money in prisons. om unit 2 macaoecon?hat fiat money can be used 0 pay for grey ane JIy means that This basical aw of the land makes it acceptable, Any economic er cc vertte debts a8 n ae ofa good ora service knows with certay Ya rc om rv ash : ae the value is preserved Money Supply he tonal tock of money available in an economy at a particular poi sn ge This is the total money supply includes: h, which refers to bank notes and coins issued by the Central Bank Cash, whic Money held in deposits at financial institutions, such as chequing and savings at commercial banks. accou In most modern cconom cash accounts for a smaller proportion of the mones compared to deposits. There are generally two types of deposits in any economy. These are short-term deposits which can be withdrawn over a short period of time wnt long-te dposits which can normally be withdrawn over a much longer period of v1 a purposes, economists distinguish between different monetary ime. For analyti aggregates or measures These are: # The monetary base, sometimes referred to as M, in the economy. This accounts for all cash in ci cash held by the Central Bank. » is defined as the total amount of « culation in the economy as well as al # Narrow money, also called M, » covers money which is immediately available for spend posits, This measur ing. That is, it comprises the monetary base and all short-term dey of money fulfils the medium of exchange function, ® Broad money, also known as M. » Measures the total amount of money in the econ Broad mone) arrow money plus long-term deposits hell at financial inst aggregate fulfils the store of value function, is therefore n: tutions. This monetary The Three Motives for Demanding or Holding Money The demand for mone Lr ample ifa person has $200 ¢ that person's deman because of Mount of money a person holds in theit ra ish in hand and $900 deposited in ary ‘ “ d for money is $1100 ($200 + $900), In general, people three motives: y refers to the |. ‘Transactionay OUt routine : joe 10 610T9 ; ; ey held for daily 0 "Y Motive —This refers to the amount of money hel at, a . , ero i transactions. As an individual receives his or her 0 «eo NIT 2 ECONOMICSche end of January he or she would spend some immediately and j ; i e id hold \ throughout the month of February in order to carry out daily Md Portion period, In economic jargon, the timing of the receipt of income ren dite are OF ig are not perfectly synchronized. As a result, individuals must hold no pend income throughout the month in order to fulfil daily tranacreg, Pr°P&ttion op held for the transaetionary motive tends to increase with income, fi 'n Beneral in the interest rate which meang ee at the « Fansace to not be affected by changes istics ar ate shy, are demand for money is perfectly interest inelastic panel A and B of Figure 27-1. precautionary motive—This accounts for money held for unforeseen ex; - For instance, an individual may keep peo on ox ar broke down, This 32% These characte Min unforeseen events or contingencies per month to cater for the expense he would face if his fionary money’ balance would tend to increase as the individuals income onary 0 rs : a Tises, ic is perfectly interest inelastic, which means that changes in the interest ne fe demand for money. These traits are depicted in panel re not and B affect che precautionar 3 of Figure 27-2. 3, Speculative motive—This is any money held by individuals as they aim to take ay te of eaptal guns and avoid capital losses due to changes in the price of fea assets. It accounts for all money held in excess of the transactionary and precautg, ary motive. For example, if che total amount of money held by an individuals $199 and his rransactionary and precautionary balances are $500 and $200, respectively, hen his speculative balance is $400 ($1100 ~ $500 ~ $200). The speculative motive for holding money is distinct from the other two, in that it accounts for any money hl in the hope of either making a speculative gain, or avoiding a possible loss as 2 real of a change in the interest rate and hence the price of financial assets. To demonstate the nature of the speculative demand for money, itis first necessary to outline both the portfolio balance and the normal rate of interest. Figure 27- Panel A: Positively Related to Panel B: Not Affected by the Interest Rate Income ML IR, a | %, M[ Totot | weeith na p | p | f | | | z ~ - = Financial |__| securities, Equities, Bonds ete. Assets Money Bolaneus ft77 | Speculative Demand for Money