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Summary ECS1601 - Chapter 2
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ECS1601 - Chapter 2 Exam Summary
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CHAPTER 2MONEY AND MONETARY POLICY
As per the checklist:
List the functions of money:
Money is a medium of exchange (this is the primary function)
It allows us to move beyond a barter economy
where has to be a double coincidence of wants for exchange to happen o The
system is cumbersome and inefficient
Thus monetary economies are much better, and serves as an
intermediary (or medium of exchange)
Generally acceptable means of payment
Money is a unit of account
It is a common measure of the cost to enable comparison
Also allows us to work out GDP
Can lose some of its usefulness during inflation
Is not the only unit of account as any commodity or product can be used, but it
is the most convenient
Money as a store of value
I.e. for holding savings, which is convenient and easy to use at a later date (is
liquid)
Can also have assets though, which is better at times of high inflation, when
money LOSES value
Thus one can see that money is not the only store of value, and is not always
the BEST store of money either
The store value of money also serves as a standard of deferred payment (ice
you pay back a loan in rands and cents)
It is also the means by which credit is granted
Define money
Money is anything that is generally accepted as payment for goods and
services or that is accepted in settlement of debt
1. Money is a generally acceptable means of payment
2. This is because people believe it will be accepted as payment by other
people
Differentiate between money, income and wealth
Money is anything that is generally accepted as payment for goods and
services or that is accepted in settlement of debt
Income is the reward earned in the production process and is usually
measured in money
Wealth is assets that are accumulated over time. Can include money.
Different kinds of money
, List the properties of money
Uniform
Durable
Divisible
Able to be carried
Explain why credit cards are not seen as money
Demand deposits are NOT created when someone is issued with a credit card
They are just a convenient way to make a purchase by making a short term
loan from a bank or other financial institution
When you purchase with a credit card, the bank pays for the item, and you
pay the bank at the end of the month
NOTE: cheques and debit cards also not money, but they allow people to
transfer money from their own demand deposit to someone else to pay for
something, and are thus a way of making transfer.
M = quantity of Money,
Money in C = cash (coins and notes in circulation outside the monetary system)
South Africa D = demand deposits (which is by far the largest component, usually
around 90%)
Explain the
difference between M1, M2 and M3
M1 – includes coins, bank notes and demand deposits only
M2 – includes short-term and medium-term deposits (quasi money) and is
more than one and a half times the value of M1
M3 – which includes long-term deposits, is regarded as the best
measure of developments in the monetary sector
M1, M2 and M3 are the different ways in which the SARB measures the quantity of
money
The conventional measure (M1)
Defined on the basis of the functions of money as a medium of exchange
Includes all articles generally available as a medium of exchange (or means
of payment)
M1 includes coins and notes (in circulation outside the monetary sector) as
well as all demand deposits (including cheque and transmission deposits)
of the domestic private sector with monetary institutions
NOTES:
1. Only money in the hands of public can be used as a means of payment – thus
the proviso “in circulation outside the monetary sector”)
2. Demand deposits refer to deposits that can be withdrawn immediately by
means of a cheque, against which cheques may be written out.
Can be written as equation:
M=C+D
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