Tag: theories of distribution

Money refers to a common medium of exchange that is issued under the law of government and acts as a legal tender for the whole country. The functions performed by money are as follows: 

1. Medium of exchange: As a medium of exchange, it refers to a function of money in which money is considered as a mode of exchanging goods. This function of money solved the main problem of barter system which was double coincidence of wants.

2. Common measure of value: As a measure of value, it refers to a function of money that helps in determining the value of goods and services. Money is taken as the common denominator while measuring the value of goods and services in monetary terms.

3. Store of value: As a store of value, it refers to the function of money  that helps individuals in storing their wealth in the form of money. Therefore, money acts as an asset that sustains value over a period of time.

Money refers to a common medium of exchange that is issued under the law of government and acts as a legal tender for the whole country. The main function of money according to modern economics is money as a store of value. As a store of value, money functions by helping individuals to store their wealth in the form of money. Therefore, money acts as an asset that sustains value over a period of time because it is non-perishable and inexpensive form of storage. 

True.

A liquidity trap is an economic situation where people hoard financial capital instead of investing or spending it as the interest rates are low and savings rates are high which renders monetary policy ineffective. So, people believe that the interest rates will soon rise, which might decrease the prices of the bonds. Therefore, the demand for money depends on the rate of interest in the economy which hence makes the demand for money perfectly interest elastic. 

Money as a measure of value, helps in determining the value of goods and services in the economy. Money is taken as the common denominator while measuring the value of goods and services in the economy. Therefore, with the help of this function everything can be measure in a common denominator or unit. 

Liquid asset refers to the assets which are either in the form of cash or can easily be converted in to cash. Since currency of any country is already in the form of cash. Therefore, currency is considered the most liquid asset among all the assets in the economy. 

A liquidity trap is an economic situation where people hoard financial capital instead of investing or consuming it as the interest rates are low and savings rates are high which renders the monetary policy ineffective. So, people believe that the interest rates will soon rise which might decrease the prices of the bonds. Therefore, the demand for money depends on the rate of interest in the economy which hence makes the demand for money perfectly interest elastic.