FMT 409- Monetary Economics

2.0 OBJECTIVES

It is hoped that by the end of this unit, you will be able to: · understand the meaning of money and its evolution. · show the various types of money and the functions that money performs in every economy.

3.0 MAIN CONTENT 3.1 Definition of Money? Everybody who has reached the age of Kindergarten knows what money is. You possibly have touched money today. However, the term ‘money’ means different things to the ordinary man in the street. It is often used to describe wealth and financial resources, credit and income. When we say “the man has money or the man is in money”, we are referring to money as wealth or financial resources. It differs from the way an economist uses the term ‘money’. Economists see money as anything that serves as a medium of exchange in a given society. Chandler and Goldfield (1997) defined money as “anything that is generally acceptable as a medium of exchange”. Amacher and Ulbrich (1986) defined it as “an item that people accept as payment for goods or services.” Cox (1983) defined it as “anything which passes freely from hand to hand and is generally acceptable in settlement of debt and other financial obligation is money.”Traditional view or view of the currency school and keynes defined money as '' currency and demand deposits''(M = C + D where M - Money supply, C - Currency and D - Demand deposits). Friedman's empirical definition of money means ''literally the number of cash people are carrying around in their pockets, the number of cash they have to their credit at banks in the form of demand deposits and commercial bank time deposits''. Friedman's theoretical definition of money defines money as ''any asset capable of serving as a temporary abode of purchasing power''. His broader definition of money includes bank deposits, non - bank deposits and any other type of assets through which the monetary authority influences the future level of income, prices, employment or any other important macro variable (Here, money is expressed as M2 = C + D + S + T). The Radcliffe committee defined money as '' note plus bank deposits''. Gurley - Shaw definition regard a substantial volume of liquid assets held by financial intermediaries and the liabilities of non - bank intermediaries as close substitutes for money. Intermediaries provide substitute for money as a store of value. Money proper which is defined as equal to currency plus demand deposits is only one liquid asset. They have thus formulated a wider definition of money based upon liquidity which includes bonds, insurance reserves, pension funds, savings and loan shares.