Functions of money, Evolution of Money,Transaction demand, Precautionary demand, Asset motive/speculative demand

 

MONEY:

• Money is an economic liquid asset used for economic transactions 
• It is recognized as a medium of exchange for transactional purposes in an economy like buying goods and services.
• Currency is the basis of Economy in the sense that its movement in the economy is the barometer of the health of Economy.

Functions of money: 

There are primary and secondary functions of money.

Primary functions include:

•  Money as a means of Exchange avoiding the inefficiencies of a barter system
•  Money as a unit of account as a standard numerical unit of measurement

Secondary functions include:

• Money as a means to settle debt - a unit in which debts are denominated.
• Money as a store of value that can be used as a standard measure and common denomination of trade

EVOLUTION OF MONEY:

                                     Barter system 

                                            ↓

                         Goods like fur, salt ,rice and wheat  used as currency.

                                            ↓

                         Metallic standard (Gold standard and silver standard)

                                            ↓

                                   Paper currency 

                                            ↓

                                   Plastic currency 

                                            ↓

                                   Crypto Currency

DEMAND FOR MONEY:

• The demand for money refers to liquidity preference of individuals. 
• It means that how much assets an individuals wish to hold in the form of liquid money (as opposed to illiquid physical assets).
• The demand for money is dependent upon  economic as well as non economic factors.

In his book "The General Theory of Employment, Interest and Money " John Maynard Keynes talked about three type of demands:

Transaction demand – 

It is that part of the money which we need to purchase goods and services in day to day life.

Precautionary demand:

This demand occurs when we require money for unexpected purchases or emergencies. eg. for medical emergencies.

Asset motive/speculative demand: 

The speculative motive for demanding money comes into play when the individual is having a choice to invest the money in investment or to hold it in the form of cash.

In the situation of liquidity trap, the demand for money is infinitely elastic. Increasing the money supply is ineffective in boosting demand.