Money Mechanics

Chapter One

In the ancient times people used to trade goods and services by exchanging their surplus material goods. This is known as barter. This was an unfeasible trade mode, as the exchangers might not have pertinent items for trade. And did not allow for an increase in the standard of living. In the modern world one of the major steps in enhancement in productivity and standard of living was the development of the concept of specialization. Specialization refers to the break down of work process into different tasks, and assigning the task to that particular individual who is a specialist in the task. The development of specialization led to a decrease in self-reliance in productivity, particularly of households. Almost all household goods are supplied by external suppliers. Specialization would require some medium of exchange in order to compensate the producer. This medium of exchange is known as money. The supply of money has to be managed efficiently; otherwise it can affect the whole economy. If there is an excess supply of money in the market, it can result in people buying too many goods and services. This would lead to an increase in the production of goods and services, and since there are a great number of buyers in the market the producers are likely to sell at a higher price in the hope of earning large revenues. Consequently this would lead to inflation. Inflation is the generalized and persistent increase in the prices of all goods and services in the economy. Therefore, excess money supply is damaging for the economy. In contrast, if the money supply is low in the market, it would lead to a reduction in the consumption of goods and services. Hence, the overall production is also reduced. This would lead to producers charging low prices for goods and services in order to attract buyers. Consequently, this would lead to a deflation in the economy. Deflation is the persistent and generalized decrease in the prices of all goods and services in the economy. The businesses will also make several workers redundant in the attempt to reduce the costs of production. This would result in the rise unemployment rate of the country. Unemployment is when the people who are able and willing to work cannot find work.

There are different categories of money. As mentioned previously, that money is anything that can be used as a medium of exchange. However this category would not cover the “plastic money” such as credit and debit cards, because they are primarily meant to represent the paper money. The medium of exchange that is presently used in the modern world is the currency notes and coins issued by the government. In the context of United States, the only form of money is also the notes and coins. The power to create money only rests with the US Federal Reserve and US Treasury.

Velocity of money is related to its circulation. It refers to the rate of the expenditure of money and ...