Money is anything that is generally accepted as a medium of exchange for goods and services or for the repayment of debts.

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TYPES OF MONEY

• Commodity Money: Money that has intrinsic value (e.g., gold, silver).
• Flat Money: Money that has no intrinsic value but is declared by the government to be legal tender (e.g., paper currency).
• Representative Money: Money that represents a claim on a commodity (e.g., gold certificates).
• Digital Money: Electronic form of money (e.g., cryptocurrencies, e-wallets).

10.1     CHARACTERISTICS OF MONEY

• Durability: Money must withstand physical wear and tear.
• Portability: Money should be easy to carry and transfer.
• Divisibility: Money must be easily divisible into smaller units.
• Uniformity: Money must be identical in terms of value and appearance.
• Limited Supply: Money must be scarce to maintain its value.
• Acceptability: Money must be widely accepted as a medium of exchange.

10.2     FUNCTIONS OF MONEY

• Medium of Exchange:  Facilitates transactions by eliminating the need for barter.
• Unit of Account: Provides a standard measure of value for goods and services.
• Store of Value: Maintains value over time, allowing for savings.
• Standard of Deferred Payment: Used to settle debts in the future.

DEMAND FOR MONEY: It Refers to the desire to hold money for transactions, precautionary, and speculative purposes. Influenced by factors such as income levels, interest rates, and price levels.

SUPPLY OF MONEY: Controlled by central banks through monetary policy. Includes various measures such as M1 (cash and checking deposits) and M2 (M1 plus savings accounts and time deposits).

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QUANTITY THEORY OF MONEY (FISHER EQUATION): This theory suggests that changes in the money supply directly affect price levels and economic output.

It is expressed by the equation = PQ

Where:                 M = Money supply,

V = Velocity of money (the rate at which money circulates),

P = Price level,

Q = Quantity of goods and services produced

          10.3     THE VALUE OF MONEY AND THE PRICE LEVEL

• The value of money is inversely related to the price level; as prices rise, the purchasing power of money falls.
• Inflation decreases the value of money, while deflation increases it.

          10.4     INFLATION

Inflation is the persistent rise in the general price level of goods and services in an economy over a period of time. It reduces the purchasing power of money, meaning that the same amount of money buys fewer goods and services.

TYPES OF INFLATION

• Demand-Pull Inflation: This occurs when the demand for goods and services exceeds the available supply, causing prices to rise. It is often associated with a growing economy.
• Cost-Push Inflation: This happens when the cost of production (e.g., wages, raw materials) increases, leading to higher prices for goods and services.
• Hyperinflation: An extremely high and uncontrollable increase in prices over a short period, often due to excessive money supply.
• Stagflation: A situation where inflation occurs alongside stagnant economic growth and high unemployment.
• Creeping Inflation: A slow and steady rise in prices over time, typically seen as manageable or normal in a healthy economy.
• Galloping Inflation: A more intense and rapid form of inflation compared to creeping inflation, where prices rise at double-digit or triple-digit rates annually.

10.5     MEASUREMENTS OF INFLATION

• Consumer Price Index (CPI): Measures the average change in prices paid by consumers.
• Producer Price Index (PPI): Measures the average change in selling prices received by domestic producers.

10.6     EFFECTS OF INFLATION

• Reduces purchasing power.
• Creates uncertainty in the economy.
• Can lead to wage-price spirals.

10.7     CONTROL OF INFLATION

• Central banks can use monetary policy (e.g., raising interest rates) to control inflation.
• Fiscal policy measures (e.g., reducing government spending) can also be employed.

          10.8     DEFLATION

It refers to a sustained decrease in the general price level of goods and services in an economy over a period of time. Deflation increases the purchasing power of money, meaning that goods and services become cheaper.

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TYPES OF DEFLATION

• Monetary Deflation: Caused by a reduction in the money supply or credit availability in the economy, leading to lower spending and falling prices.
• Price Deflation: Occurs when production costs decrease (e.g., due to technological advancements), causing prices to fall across industries.
• Debt Deflation: Happens when falling prices increase the real value of debt, leading to reduced spending and investment.
• Supply-Side Deflation: Arises from an increase in the supply of goods and services, often due to improvements in productivity or efficiency.

MEASUREMENTS OF DEFLATION – Similar to inflation, deflation is measured using CPI and PPI, but shows a decrease in price levels.

          10.9     EFFECTS OF DEFLATION

• Increases the real value of debt.
• Can lead to reduced consumer spending as people anticipate lower prices.
• May result in economic recession.
• Central banks may lower interest rates to encourage borrowing and spending.

Government can increase spending to stimulate demand.