Definition of Money, Prices, and Inflation

Functions of Money

• The main function of money is to facilitate economic transactions by providing a medium of exchange, a unit of account, and a store of value.

Types of Money

• Commodity-based money, such as gold, has high intrinsic value.

Money Supply

• The central bank determines the money supply (Ms) of an economy.

Fiat Money

• Fiat money has no intrinsic value, but its value is derived from government decree or law.

Barter Economy

• In a barter economy, the main method of trading goods is through direct exchange without using a medium of exchange.

Functions of Money

• The two functions of money mentioned are a medium of exchange and a unit of account.

Cambridge Equation

• The Cambridge equation is used to represent the relationship between the money supply and the price level.

Neutrality of Money

• The neutrality of money implies that an increase in the money supply only affects nominal variables, not real variables, in the long run.
• The neutrality of money manifests the classical dichotomy principle in the long run.

Effects of Inflation

• High inflation has a negative effect on the economy.

Dichotomy Principle

• The dichotomy principle implies that real variables, such as output and employment, are independent of nominal variables, such as the price level.

Exchange Rates

• Nominal exchange rates are quoted in European terms as the number of units of the foreign currency per unit of the domestic currency.
• The appreciation of a currency represents an increase in its value relative to other currencies.
• The nominal exchange rate represents the number of units of the foreign currency that can be exchanged for one unit of the domestic currency.

Hysteresis Effect

• The hysteresis effect is related to the phenomenon where the effects of economic shocks persist even after the shocks have been removed, resulting in a permanent change in the economy.

Test your knowledge of the definition and concept of money, prices, and inflation with this quiz. Explore the role of money as a medium of exchange and store of value, as well as its connection to prices and inflation.