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Economic Theory

7. MONEY AND INFLATION

Content

1. Money: economic definition. Types of money.
2. Functions of money.
3. Market of money. Supply and demand for money.

4. Equation of exchange of money. Quantity theory of money.
5. Inflation. Types of inflation.

Key words: money, types of money, equation of exchange, the
quantity theory of money, inflation, disinflation, deflation, demand-pull
inflation, cost-push inflation, creeping inflation, walking inflation,

galloping inflation, hyperinflation, consumer price index.

1. Money: Economic Definition. Types of Money
An important element of macroeconomics is money. It is said to be
the oil that lubricates the wheels of trade. Money is much more than a tool
used to facilitate the operation of economy.

If the monetary system is working properly, it can improve production
and employment opportunities. On the other hand, when the monetary
system is out of balance, it is source of economic instability, fluctuations

in an economy’s output, inflation, and unemployment.
Money is strange stuff including gold, silver, coins, bills, notes,
entries in people's account books.
Money is a complex subject and it can best be described by the role it

plays in economic relationship. In fact, money is useful and desired not for
its intrinsic worth but rather for what it can do for us.
Money is social inventory the purpose of which is to facilitate the

workings of an economy in a number of ways.
But it is important to note that money is not absolutely necessary in
order for trade and commerce to take place. If there is no money, then the

trading of goods is accomplished by bartering one good for another on a
person-to-person basis. Barter is difficult except in small transactions and
can be time-consuming. Money is usually so superior to barter as a means

of carrying out transactions that even the most primitive societies have
some sort of monetary system.

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