Every kind of trade or exchange needs money to happen. They sell their goods in exchange for money. When there is money in circulation, it is easier for people to buy and sell. We’ll look at the functions of money supply and talk about related topics in this area.
Money is always being used. One doesn’t really think about whether to save it or spend it. In the eyes of economists, money is anything that can be used to pay for a good or service in full. Native Americans and early settlers in the United States used wampum as money. In Africa, cowry shells were used as money.
Top 10 – Functions of Money Supply
When people barter, they trade goods or services that are similar to each other. The sale can’t happen unless the person selling wants to sell. Because this isn’t likely to happen, it makes trading harder. In this article, we will cover the functions of money supply along with equivalent matters around the topic. To conclude, read about sources of money supply for more information.
When supply and demand for money are in balance, the interest rate is also in balance. The equilibrium is shown in the diagram below by the supply and demand for money.
The money demand function shows how aggregate economic indicators and the demand for money are related to each other. Because of transaction demand, the real GDP and price level will increase the demand for money. As worries about speculation spread, people buy less currency.
If we think that the central bank controls the amount of money, it is easier to explain. It doesn’t need a function to explain it because it doesn’t depend on things like the interest rate that happen around the world.
Transfer of Value
You can change the value of a currency by buying things from other countries. With money, people can buy and sell goods in their own country and all over the world.
Since this is the case, the health of the money markets depends on how much money is available. The functions of money supply is the sum total of all of the currency and other liquid assets in a country’s economy on the date measured.
Barter is the only way to get money back. Most of the time, it’s not a good idea to barter. Paying in onions and carrots might not make the green-bread grocer’s baker too happy. Most of the time, money transactions happen.
The cashier at the grocery store will, of course, take my money. On U.S. money, the words “This note is legal tender for all debts, public and private” are written. The U.S. government protects my right to pay for things with cash.
A Unit of Account
One unit of account is cash. The velocity of money is a way to measure how much money changes hands and how much a country makes over time. Gross national product, or GNP, is the value of all final goods and services made in an economy during a given year. The term “gross national product” is defined by J. R. Hicks as “the value of goods and services in terms of money.”
We use dollar signs to judge how well the economy is doing. You can figure out how much a computer costs by comparing it to t-shirts, bicycles, or corn. If you wanted to buy a new computer today, it could cost you anywhere from 100 to 150 bushels of corn, but it would be better if the price was set in dollars, which are universally accepted units of currency.
A Store of Value
Money made out of wheat, salt, or even horses and cows loses value over time. Because of this, they are not a good way to store money. If you want to know how to save money in a barter system, think like a farmer. His plan was to put away seven days’ worth of wheat. But by the time he got old, his “savings” would have been gone.
I can save $25 for tomorrow, next week, or even a year from now. Grains lose their value over time, but money will always be worth something. Money is a good way to store value, but it’s not perfect. Due to inflation, the value of money goes down over time. This is good functions of money supply.
Delayed Payment Norms
People find it easy to use money through deferred payments. This is the norm for both past and present payments. Lenders expect borrowers to pay them back for the use of their money plus interest.
When there is money, understanding interest and late payment is simple. Because of this, more people are lending and borrowing money, and new types of financial organizations have come into being.
Wealth Storage in Currency
Since many services and goods only last a certain amount of time, society needs more reliable ways to store its wealth. When inflation is low, people can save money and use it later without losing much of its buying power.
A Measure of Value
In a barter system, it’s hard to figure out how much things are worth. One Maruti car is the same as ten motorcycles, five cows, or a hundred quintals of wheat. One bad thing about trading is that everything has a dollar value.
Every good and service in an economy can receive a monetary value. In a monetary system, a single unit of value gives prices. This makes trade easier and helps people understand what prices mean. This is one of the best functions of money supply.
Frequently Asked Questions
What Happens when the Money Supply Increases?
When the money supply goes up, interest rates go down, which encourages people to spend and invest. Both the number of goods made and the number of raw materials ordered by businesses went up.
Which is the Primary Function of the Money Supply?
Even though it has changed many times, money has always served as a way to buy and sell things, a way to keep track of value, and a standard of value.
Why is it Important to Regulate the Supply of Money?
The central bank is in charge of the money supply, which helps keep the economy of a country going. Central banks control the flow of money by setting interest rates, printing money, and requiring banks to keep a certain amount of cash on hand.
Even though it has changed many times, money has always served as a way to buy and sell things, a way to keep track of value, and a standard of value. Most economies use fiat money right now. Whether or not this kind of currency is useful depends on the specific things it can do. We’ll look at the functions of money supply and talk about related topics in this area.