"Money: Is anything that is generally accepted in the payment of goods and service and in payment of debts"
Money is also referred to money supply or the quantity of money
* Benefits of money
-Keep the health and values of economy.
-Allow us to make transaction easier.
-In payment of debts.
+ Liquidity: "it is the ability of any asset to be transferred to currency" high liquid asset , low liquid asset, all depends on how fast you can transfer any asset into currency and with less loss.
Money can be classified according to liquidity into 3 types:
1- M1: the highest liquid
Money in circulation (money from hand to hand) + demand deposits
2- M2: M1 + saving deposits
3- M3: M2 + time deposits (deposits that have deposited in banks for a certain time, when you transfer time deposits into the currency you lose.
I can not ask about the quantity of money in a country, I have to specify the type I'm asking about .
*Monetary base: high powered money
It includes
1-money in circulation 2- reserves in banks
-Reserves in banks: the currency that' kept in banks, not deposits.
-Monetary policy: it is the policy that attends to control the money supply and the interest rate.
Bank; is a financial institution or organization that accepts deposits and makes loans, this definition can be applied to types of banks.
1- Commercial banks
2- Specialized banks: ex, industrial banks, agricultural banks
3- Central banks: the top of all banks, publically owned by the government, it has many branches and has 4 jobs:
- issuing money
- Bank of the government
- Bank of all banks
If commercial bank has some difficulty then it can go to central bank, each bank deposits an account in the central bank.
- control money supply,( control credits and money supply)
*Money functions as:
1- Medium of exchange
2- Store of value 3- unit of account
Why should we study money??
Money is linked to changes in many economic variables which affect all of us and are important to the health of the economy.
1) Money and inflation
Economists believe that money can cause inflation if a government expand money supply year by year we expect inflation.
Inflation can be caused by the increase in money supply, there is a positive relation between them, inflation means a continuous rise in the price level, thus we study money to control inflation.
Freidman believes that inflation is always and everywhere a monetary phenomenon, money is the only cause of inflation so government is accused of causing inflation for not controlling money supply (controlling money supply means controlling inflation, so we study money supply because inflation is a big problem)
2) Money and business cycle
Many economists believe that money plays an important role in generating business cycle, which is upward and downward movement of aggregate output produced in the economy (expansion followed by recession)
the increase in money supply could lead to expansion and the decrease in money supply leads to recession.
History in the USA shows that money supply could cause business cycle
We should study ways to control the money supply by the government.
3) Money and interest rate
Money supply have relation with the interest rate, money can cause fluctuation in interest rate.
Interest rate can be determined by the demand and supply of money.
The point of equilibrium is between demand and supply is the interest rate.
Interest rate is the cost of using money, money affect interest rate which affects all of us:
1- Consumers: have a negative relationship with interest rate
2-investment: also like the consumers have a negative relationship with interest rate.
-and this means that if the interest rate is high, investment and consumption will be low, and vice versa.
3- Savers: have a positive relationship with the interest rate.
If the interest rate is high the number of savers will increase and vice versa.
4) Conduct of monetary policy
Monetary policy is the management or controlling of money supply and interest rate.
The central bank is the organization that's responsible for the conduct of a nation's monetary policy; we control the money supply to achieve some goals.
5) Budget deficit and monetary policy
Budget deficit is the excess of government expenditure over tax revenue for a particular time period, typically a year.
The government must finance the deficit by borrowing from the central bank which leads in turn to a higher rate of inflation and higher interest rates.
We study money supply to solve any problem when there's budget deficit, the increase in money supply causes inflation then budget deficit.