Modern Economics - Macroeconomics - Inflation and Monetary Policy

Inflation and Monetary Policy

Main articles: Inflation and Monetary policy See also: Money, Quantity theory of money, Monetary policy, and History of money

Money is a means of final payment for goods in most price system economies and the unit of account in which prices are typically stated. A very apt statement by Professor Walker, a well-known economist is that, " Money is what money does." Money has a general acceptability, a relative consistency in value, divisibility, durability, portability, elastic in supply and survives with mass public confidence. It includes currency held by the nonbank public and checkable deposits. It has been described as a social convention, like language, useful to one largely because it is useful to others.

As a medium of exchange, money facilitates trade. It is essentially a measure of value and more importantly, a store of value being a basis for credit creation. Its economic function can be contrasted with barter (non-monetary exchange). Given a diverse array of produced goods and specialized producers, barter may entail a hard-to-locate double coincidence of wants as to what is exchanged, say apples and a book. Money can reduce the transaction cost of exchange because of its ready acceptability. Then it is less costly for the seller to accept money in exchange, rather than what the buyer produces.

At the level of an economy, theory and evidence are consistent with a positive relationship running from the total money supply to the nominal value of total output and to the general price level. For this reason, management of the money supply is a key aspect of monetary policy.

Read more about this topic:  Modern Economics, Macroeconomics

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