Answer to Question #234729 in Macroeconomics for VTG

Question

Money (money supply) is anything that is generally accepted in payment for goods or services or in the repayment of debts - a stock concept.

1.1. Using South African practical examples, explain the functions of money and clearly distinguish between the M1, M2 and M3 aggregate measures for money supply.

1.2. Discuss the evolution of the payment system.

Answer 1

Solution:

1.1). The functions of money include the following:

·        Medium of exchange – Money’s most significant function is to act as a medium of exchange to facilitate transactions. Money effectively eliminates the double coincidence of wants problem by serving as a medium of exchange that is acceptable in all transactions globally.

·        Store of value – Money acts as a store of value by holding its value over time, that is it can be stored for some period of time and still remain valuable in exchange.

·        Unit of account – Money functions as a unit of account by providing a common measure of the value of goods and services being exchanged. By knowing the value or price of a product, in terms of money, both the supplier and the purchaser of the product are able to make well-informed decisions regarding how much of the product to supply and how much of the product to purchase.

M1 money supply includes all the currency in circulation such as paper money, demand deposits, and traveler’s cheques including checkable deposits.

M2 money supply includes all the items in M1 including other less liquid forms of money such as savings deposits, money market accounts, and money market mutual funds.

M3 money supply includes all the items in M2 plus large-time bank deposits such as money market fund shares, money market paper, and debt security.

 

1.2). The evolution of the payment system refers to the technological advancements in the banking payment system. The evolution started with the discovery of cheques at the beginning of the 19^th century. With the arrival of the internet, the evolution of payment systems advanced even further. It led to the discovery of visa and master cards, the use of biometrics, and mobile payments, which have made banking operations much easier, flexible, and efficient.