Theory of Money [JAMB Free Tutorial on Economics]

This Economics Tutorial will focus on the THEORY OF MONEY. At the end of the tutorial, you can download it for FREE. Please share this page with your friends who may need it.

In this tutorial, we will focus on THEORY OF MONEY

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Page Contents

MONEY
TYPES OF MONEY
THE DEMAND FOR MONEY
CHARACTERISTICS OF MONEY
FUNCTION OF MONEY
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MONEY

Money is anything that is generally acceptable within a given community for the purpose of making payments and discharging obligations. Money is what any community of person say is money them, be it stone, a cow, a bangle or a piece of papers.

Money is unique among economic goods and service and it is the principle of general acceptability that distinguished it.

TYPES OF MONEY

Naira banknotes and coins (currency): The name of Nigeria money is the Naira. In Nigeria it is generally acceptable. It has also been declared a legal tender by Nigeria Law.
Bank Deposits: Bank deposits by which credits balanced are done on the current accounts of bank customers which can be operated by means of cheque. They are money because through the cheque instrument they can be used to discharge debt obligations and perform other functions of money.
Bank Overdraft facilities: The drawn overdraft is an instrument used when banks lend money. If drawn already then they are money for we use them to settle obligations. Until the facility is used however it is not yet money because no deposit has been created.
Quasi or Near Money: It can serve as standards for defend payments as a store of value. They are derived money and include:
Deposits with Non-bank financial institutions, e.g insurance companies
Other financial assets such as government securities, e.g. Treasury bills, Postal orders etc.

iii. Commodity Money: Certain assets (commodities) held by the Central Banks can be regarded as a money in Nigeria. Gold balances and Special Drawing Rights (SDRs) in the portfolio of CBN can be regarded as money in so far as we can use them to settle international indebtedment.

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THE DEMAND FOR MONEY

We want money to enable us get other things we want to eat, wear, drink etc. In other words it is a vehicle for accessibility to often things we directly need. According to John Maynard Keynes, people demand for money because of the following motives:

The transactional motive: To enable us satisfy our daily needs of foods, movement, shelter etc.
The precaution motive: To meet unexpected contingencies e.g sudden deaths, accidents, surprise visit by friends and other contingencies for the rainy day.
The speculative motive: To take advantage of changes in prices of commodities that we buy. That is buying low and sell high, it is with a view to make profit.

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CHARACTERISTICS OF MONEY

Scarcity: The commodity must be scarce, which means that it must have intrinsic value that in value use. This makes it an economic commodity. Commodities that are not scarce have no value economically.
Generally Acceptability: It should be generally acceptable as a means of exchange of goods and services without objections, however for it to posses its acceptability; it should have some intrinsic value for its monetary purpose.
Portability: It can be transported from place to place. In order words it must possess high value in small bulk and easily carried around.
Durability: As money is passed from hand to hand and is kept in reserve, it must not easily deteriorate as a result of wear and tear.
Homogeneity: An portions or specimens of used as money should be the same, that same quality, weight and some value. It is used to measure value.
Divisibility: The money material should be capable of division because of the convenience if offers in making purchases of all types big and small.
Cognoscibility: Must be easily recognized and distributed from other substance.

FUNCTION OF MONEY

MEDIUM OF EXCHANGE: Money facilitates exchange of goods and services to reduce the time and effort to carry on trade.
MEASURE OF VALUE: It measures value of goods and services, therefore makes price mechanism possible in an exchange economy. Money is the basis for keeping accounts, calculating profits and losses, costing and budget.
Standard of Deferred payments: Money is a unit in which loans are made, future contracts fixed, without money there would be no basis for dealing in debts and deferring payments.
Store of value: Money is a convenient way to keep surplus wealth until it is required for utilization like bonds, securities and real properties. It is even better store in value in the sense that it costs less to keep or store and is extremely liquid.

EXERCISES:

Note: The first person to answer the 10 questions correctly will be rewarded with N2,000.

which of the following is not a quality of money (a) divisibility (b) portability (c) acceptability (d) durability
which of the following must any form of money possess in order to be general acceptable (a) divisibility (b) mobility (c) durability (d) legality
notes and coins are legal tender because they are (a) printed by the central bank (b)backed by law (c) back by gold (d) issued by all banks.
which of the following qualities of money is generally undermined by inflation (a) stability (b) scarcity (c) durability (d) portability
the process of exchange goods for goods in called (a) double coincidence of wants (b) barter systems (c) indirect trade (d) production
which of the following is a function of money (a) durability (b) acceptability (c) store of value (d) portability
______________ is anything that is generally acceptable within a given community for the purpose of making payments and discharging obligation (a) bank (b) money (c) ministry of finance (d) CBN
____________ Bank deposits by which credits balanced are done on the current accounts of bank customers which can be operated by means of cheque. (a) Bank deposit (b) cash deposit (c) cheque deposit (d) withdrawal deposit
__________ is a convenient way to keep surplus wealth until it is required for utilization like bonds, securities and real properties. (a) store of value (b) measure of value (c) medium of exchange (d) standard for deferred payment.
__________should have some intrinsic value for its monetary purpose (a) Generally Acceptability (b) durability (c) store of value (d) portability.