Money: high liquidity
Wealth: low liquidity

Properties

  1. Divisibility: to be a valued medium of exchange, currency must be divisible. €50 notes can be exchanged for €10 euro notes or €1 coins
  2. Acceptability: the currency must be valued and widely accepted by society as a valid way to pay for goods/services
  3. Durability: the currency must be robust, not easily defaced/destroyed and last for a long period of time
  4. Scarcity: the supply of the currency should be such that remains desirable and retains its value in the market. Oversupply would decrease its worth
  5. Uniformity: in order to be a valid measure of value each denomination must be exactly the same e.g. every $50 note must be exactly the same
  6. Portability: good currency is easy to carry/conceal

Functions

A Medium of Exchange:

  • Without money, it becomes necessary for buyers and sellers to barter (exchange goods)
  • Bartering is problematic as it requires two people to want each other’s goods (double co-incidence of wants)
  • Money easily facilitates the exchange of goods as no double co-incidence of wants is necessary
    A Measure of Value
  • Money provides a means of ascribing value to different goods and services
  • Knowing the price of a good in terms of money allows both consumers and producers to make decisions in their best interests
  • Without this measure it is difficult for buyers and sellers to arrange an agreeable exchange
    Store of Value
  • Money holds its value over time (of course inflation means that is not always true!)
  • This means that money can be saved
  • It remains valuable in exchange over long periods of time
    A Method of Deferred Payment
  • Money is an acceptable way to arrange terms of credit (loans) and to settle any future debts
  • This allows producers and consumers to acquire goods in the present and pay for them in the future

Bank

Central Bank

government institution (usually independent), manages a country’s money supply (the sole supplier of central bank money) and interest rates

Role

to maintain the stability of national currency and the money supply
They are not able to cover eligible institutions’ functionalities.

Commercial banks

Main functions

Accepting deposits
Making personal and commercial loans(overdraft, mortgages)
Credit creation(to gain purchasing power)

Secondary functions

Helping customers make and receive payment
Buying and selling shares for customers
Providing insurance or tax services
Exchange foreign currencies
Internet banking facilities

Interest rate

The price of money
an index of the preference . . . for a dollar of present [income] over a dollar of future income

(expressed as a % per unit of money)
cost of borrowing money, benefit of saving money
The base rate of interest in an economy is set by the central back or the government.
The rate which the central bank will charge banks for lending them money.
(其他银行向央行的借款利率)

  • Interest rate rises -> consumer spending decrease