Q.
a) Elaborate four (4) functions of money in an economy. (4 marks)
b) Elaborate the different types of money. (4 marks)
c) Differentiate between M1 and M2 supply of money. (4 marks)
d) Discuss the causes of money supply to rise in an economy. (8 marks)
(20 marks, 2012 Q7)
A.
a) Function of money refer here.
b) Different types of money.
There are several kinds of money varying in liability and strength. The society has modified the money at different times and in this way several types of money are introduced. When there was ample availability of metals, metal money came into existence later it was substituted by the paper money. At different times, several commodities were used as the medium of exchange. So, it can be said that according to the needs and availability of means, the kinds of money has changed.
There are 4 major types of money :
- Commodity Money
- Fiat Money
- Fiduciary Money
- Commercial Bank Money
Commodity Money
It is the simplest kind of money which is used in barter system where the valuable resources fulfill the functions of money. The value of this kind of money comes from the value of resource used for the purpose. It is only limited by the scarcity of the resources. Value of this kind of money involves the parties associated with the exchange process. These money have intrinsic value.
Whenever any commodity is used for the exchange purpose, the commodity becomes equivalent to the money and is called commodity money. There are certain types of commodity, which are used as the commodity money. Among these, there are several precious metals like gold, silver, copper and many more. Again, in many parts of the world, seashells (also known as cowrie shells), tobacco and many other items were in use as a type of money & medium of exchange.
Ex : gold coins , beads , shells, pearls, stones, tea, sugar, metal
Fiat Money
The word fiat means the"command of the sovereign". Fiat currency is the kind of money which don't have any intrinsic value and it can't converted into valuable resource. The value of fiat money is determined by government order which makes it a legal instrument for all transaction purposes. The fiat money need to be controlled as it may affect entire economy of a country if it is misused. Today Fiat money is the basis of all the modern money system. The real value of fiat money is determined by the market forces of demand and supply.
Ex : Paper money, Coins
Fiduciary Money
Today's monetary system is highly fiduciary. Whenever, any bank assures the customers to pay in different types of money and when the customer can sell the promise or transfer it to somebody else, it is called the fiduciary money. Fiduciary money is generally paid in gold, silver or paper money. There are cheques and bank notes, which are the examples of fiduciary money because both are some kind of token which are used as money and carry the same value.
Commercial Bank Money
Commercial Bank money or demand deposits are claims against financial institutions that can be used for the purchase of goods and services. A demand deposit account is an account from which funds can be withdrawn at any time by cheque or cash withdrawal without giving the bank or financial institution any prior notice. Banks have the legal obligation to return funds held in demand deposits immediately upon demand (or 'at call'). Demand deposit withdrawals can be performed in person, via cheques or bank drafts, using automatic teller machines (ATMs), or through online banking.
There are also various other types of money like the credit money, electronic money, coin and paper money, Fractional money and Repesentative money as discussed below :
Fractional Money
It is a hybrid type of money which is partly backed by a commodity and has a fiat money transaction purpose. If the commodity loses its value then Fractional money converts into Fiat money.
REPRESENTATIVE MONEY
It represents a claim on commodity and it can be redeemed for that commodity at a bank . It is a token or paper money that can be exchanged for a fixed quantity of commodity. Its value depends on the commodity it backs.
Coins
Metals of particular weight are stamped into coins. There are various precious metals like gold, silver, bronze , copper whose coins are already used in human history. The mintingg of coins is controlled by the state.
Paper Money
Paper money don't have any intrinsic value , as a fiat money it is approved by government order to be treated as legal tender through which value exchange can happen. Governments print the paper money according to the requirements which is tightly controlled as it can affect the economy of the country.
Interesting facts about various types of money :
• In China cowry shells are regarded as money during 1000 B.C to 1200 B.C.
• Leather bags are treated as money in the ancient city of Carthage.
• Copper coins are treated as money by Romans 600B.C.
• Silver coins are treated as money by Ancient Persians between 600-300 B.C.
• Gold Coins are treated as money in 600 B.C in Anatolia (Asian Turkey or Asia Minor )
• Paper Money first appeared in China about 800 AD . In Europe, Sweden is the First country to issue Paper Money in 1661.
Ref:
Search 'types of money' at Finance-Maps of World
http://finance.mapsofworld.com/money/types/