define and explain what money is what are the types of money

define and explain what money is. what are the types of money?

Solution

Ans.

Money is a medium of exchange that is used to make transactions and accepted as mode of payment. It serves as medium of exchange, store of value and unit of account.Being a medium of exchnge, for purchase of any good and service, in exchange money is paid as mode of payment. Money serves as unit of account that means the measure the value of things.It is a simple tool to identify commodity value. As in barter system when there is exchange of two goods such as one sheep for one kg of rice. It did not reflect about the true value of each commodity.But with money it is easy to communicate value of products such as the cost of the pen is $5. It also serves as store of value as we can store for a week or for years, it holds value over a time.such that it can be used as standard of future payments.

The different types of money are

a) commodity money - It is an oldest type of money and related to barter system where goods and services are directly exchanged for other goods and services.examples are gold, spices, pearls etc. Its value is defined by intrinsic value of commodity itself.

b) fiat money - Its intrinsic value is lower than face value.Such as coins and bills.The goverenment declares fiat money to be legal tender and all citizens have to accept as mode of payment.

c) commercial bank money - These are claims against financial institutions used to purchase goods and services.It is created through fractional reserve banking which is a banking system where banks hold fraction of money which customers deposits as reserves.

d) fudiciary money - It is a medium of exchange not declared as legal tender by goverenment but issuer of fudiciary money promises to exchange it back for commodity or fiat money when requested by bearer.such as bank notes and drafts.