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Monetary theory - Research Paper Example

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Name Macro & Micro economics 1 November, 2012 Monetary Theory Money: The world is full of people running various businesses, organizations and even governments that deal with money all through different structured levels. They all have different interpretations in the event that money is in their pockets; wealth, power and contentment in nature among others…
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Monetary theory
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Monetary theory

Download file to see previous pages... Its value differs in different regions and parts of the world when compared. However, it is a common accepted and standard means of exchange by people within a boundary; that is why an individual from outside a nation will find himself with either few or more money after currency change in a foreign land that does not share similar currency. According to Leyshon and Thrift, there exist several forms of money, “namely; pre-modern money; commodity money; money of account; state money and virtue money” (3). Money exists as paper (certified currency notes), metallic coins, made of kinds of metals and credit money which is easily convertible and highly appreciated through cheques. In the past, a variety of commodities ranging from iron, gold, copper, silver, shells and animals served as a medium of exchange in various locations and times. The history of money can be traced back from the act of exchange; however, barter trade was not able to handle the complexity of life dealings and so had to be replaced with a common medium. Money must be easy to transport and identify, durable, difficult to duplicate, divisible and widely accepted (“the measure of money,” boj.org). Money supply in the economy: This is simply the amount of money circulating in an economy. Several methods have been put across to measure money supply in an economy. However, the measures differ from nation to nation, in time and the intention. According to Dwivedi, “(i) money supply is a stock variable and measure of money supply refers to the stock of money at of point in time; (ii) by measure of money supply is meant the measure of stock of money available to the public as a means of payments and store of value and (iii) the term ‘public’ means all economic units including household, firms and institution” (212) excluding some areas like commercial and main central banks where money is in circulation. To quantify money, various policy makers and economists use M0, M1, M2 and M3 methods. “M1includes money in circulation, checkable deposits and traveler’s checks while M2 adds savings deposits, time deposits held in depository information and money market mutual funds share on top of M1”( Gwartney, Stroup, Sobel, and Macpherson 266). M0 is the monetary base from which other measures build on while M3 is a broader measure including items that would be termed to be close substitutes for money. Money value is affected by its supply in the market; when its supply is limited comparing with its demand, its value is high at the time, but when unlimited in circulation, it looses its value; that is, one uses a lot of it to buy few items. Money supply is a very central issue in any nation; in most countries, it is handled by the government through central banks and treasury, other involved groups are credit unions and depository institutions among others with regard to a nation. Money supply in an economy will always affect interest rates; with increase in supply, the GDP increases too in the short run while price level in the long run, otherwise they both decrease in the same manner respectively. Money supply is important to GDP calculation and its increase bids bond prices up as it slows down the interest rate to affect investments which in turn influences total output in an economy. Suppose money supply generates faster than real output, inflation tends ...Download file to see next pagesRead More
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