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6 MONEY AND INFLATION

1 Money: the economic definition.
2 Types of money.
3 Functions of money.
4 Market of money. Supply and demand for money.
5 Equation of exchange or law of money.
6 Inflation. Types of inflation.

Key words: money, types of money, equation of exchange, inflation,
disinflation, deflation, Consumer Price Index,

To an economist, money does not refer to all wealth but only to one type of it:
money is the stock of assets that can be readily used to make transactions. Roughly
speaking, the dollars in the hands of the public make up the nation’s stock of money.
The types of money:
1) commodity money is money that is based on a commodity with some
intrinsic value
2) representative money is paper currency that can be exchanged for a fixed
amount of a valuable commodity, usually gold or silver,
3) fiat money is established as money by the government but has no intrinsic
value. The best example of fiat money is paper currency;
4) electronic money.

Money serves three basic functions:
1) medium of exchange: because you can use it to buy the goods and services
you want, everyone’s willing to trade things for money;
2) measure of value: it simplifies the exchange process because it’s a means of
indicating how much something costs;
3) store of value: people are willing to hold onto it because they’re confident
that it will keep its value over time.

The demand for money is the relationship between the quantity of money
people want to hold and the factors that determine that quantity.
The quantity of money available in an economy is called the money supply.
The government’s control over the money supply is called monetary policy.
Money supply is the entire stock of currency and other liquid instruments
circulating in a country's economy as of a particular time. Also referred to as money
stock, money supply includes safe assets, such as cash, coins, and balances held in
checking and savings accounts that businesses and individuals can use to make
payments or hold as short-term investments.
The various types of money in the money supply are generally classified as
Ms, such as M0, M1, M2 and M3, according to the type and size of the account in
which the instrument is kept. Not all of the classifications are widely used, and each
country may use different classifications. M0 and M1, for example, are also called
narrow money and include coins and notes that are in circulation and other money

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