Anything that is generally accepted as a form of payment can be considered money. Money's most important functions in the economy are serving as a medium of exchange and facilitating trade. Money also serves as a unit of account, a store of value, and a standard of deferred payment. Individuals choose to hold some of their wealth in the form of money, even though doing so has an opportunity cost. People hold money to perform transactions and may also wish to hold some additional wealth as money in case of an emergency or an opportunity to purchase an attractive financial asset. There is an inverse relationship between the interest rate and the quantity of money demanded. The Federal Reserve determines the supply of money. The Federal Reserve can alter the equilibrium interest rate by altering the money supply.
At A Glance
Money is anything that is commonly accepted as payment for goods and services. Commodity money has intrinsic value, while fiat money does not.
- Money serves four important functions in the economy: (1) as a medium of exchange, (2) as a unit of account, (3) as a store of value, and (4) as a standard of deferred payment.
- The demand for money is the desire to hold wealth in the form of money. Individuals demand money to facilitate transactions, as a precaution for emergency expenditures, and to have it available to purchase financial assets.
- The supply of money is determined by a country's central banking institution, which is the Federal Reserve System in the United States.
- The equilibrium interest rate is the rate at which the quantity of money demanded is equal to the quantity of money supplied. The Federal Reserve can alter the equilibrium interest rate by adjusting the supply of money.