Page 141 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics Hitesh Jhanji, Lovely Professional University

Notes Unit 8: Money

CONTENTS
Objectives
Introduction

8.1 Functions of Money
8.2 Measures of Money
8.3 Demand for Money

8.3.1 Factors affecting Demand for Money
8.3.2 Motives for Holding Money
8.4 Summary
8.5 Keywords
8.6 Review Questions

8.7 Further Readings

Objectives

After studying this unit, you will be able to:
State the functions of money;

Describe the measures of money;
Identify the factors affecting demand for money;
Discuss the motives for holding money.

Introduction

You all use money in your day-to-day life, but do you know that money is a very important
instrument in Macro Economic policy. Money is defined anything that is generally accepted as
a medium of exchange. Most economic transactions are held through money. Main examples are
buying, selling, borrowing, lending, etc. This is the characteristic of a monetary economy.
Various kinds of money are divided into two groups: commodity money and fiat money.
(a) Commodity Money: This refers to any commodity used as money. Historically gold,
silver, animals, grains, etc. have been used as money. A commodity money also has an
intrinsic value. It means that it can be used both as a commodity as well as money. For
example, silver when used for ornaments, medicines, etc. is a commodity; and when used
for exchange is a money.

(b) Fiat Money: Fiat means a decree, or a formal authoritative order. Fiat money is anything
declared by the state to serve as a medium of exchange. It is also called “legal tender”.
Currency notes, coins are the main examples.
Unlike commodity money, flat money has virtually no intrinsic value.

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