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ALLAMA IQBAL OPEN UNIVERSITY, ISLAMABAD (Department of Economics) Course: Monetary Theory and Policy (811) Level: MSc Semester: Autumn, 2019 ASSIGNMENT No. 1 (Unit 1–5) Q.1 What is money? Discuss various models of money supply. (20) Money:- Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country . The main functions of money are distinguished as: a medium of exchange ; a unit of account ; a store of value ; and, occasionally in the past, a standard of deferred payment . Any kind of object or secure verifiable record that fulfills these functions can serve as money. Money is historically an emergent market phenomenon establishing a commodity money , but nearly all contemporary money systems are based on fiat money . Fiat money is without intrinsic use value as a physical commodity, and derives its value by being declared by a government to be legal tender ; that is, it must be accepted as a form of payment within the boundaries of the country, for "all debts, public and private". The money supply of a country consists of currency (banknotes and coins) and bank money (the balance held in checking accounts and savings accounts ). Bank money usually forms by far the largest part of the money supply Money dictates the flow of human living in the modern world. Without money, life is often difficult and painful, and even more for a man . It helps to create freedom. I’ve seen both want and abundance of money in life, and I can say one of the most depressing times in life was when I was without money. The importance of money Money is considered as the King of the free market economy. Every work starts and ends with money. Money occupies in important place in all economic activities. All businessmen, traders and individuals depends upon money for meeting their expenses. In the words of Marshall “Money is the pivot round which the whole economic system clusters”. The truth is that money is one of the greatest inventions of mankind. In money economic every branch of economic activity is different from what it was in barter economy. There is no doubt that money facilitates and motivates all economic activity relating to consumption, production, exchange and distribution. Money enables a consumer to maximise his satisfaction. Money measures the intensity of desire and utility of commodity to a consumer. Money fascilitates production by stimulating saving and investment. It gives molnlity to capital and helps in capital formations. It enables the harnessing of various factors or production so that the entrepreneur is able to maximise his profit. Introduction of money facilitates exchange and helps in the development of trade and commerce, both national and international. Money functions as a common denominator for the distribution of social product.

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