Cash, a self-evident component of money, has a short life out of the banks. Within few days is spent, for example in a shop, and the shopkeeper brings urgently cash back to a bank.
plays three main roles:
it is the medium of exchange that settle payments. People accept
money in exchange of goods and services. Nothing is owed anymore.
money is the most common medium of account, i.e. it is the good
some quantity of which serves as unit of account for prices. Prices are
expressed using monetary expressions.
3. money is a store of value over time and across people, firms, countries. Selling things gives money that can be saved and spent in the future for many different goods and services. However, there exist other financial instruments - and even goods - that can serve as a store of value as well.
exist a few definitions of money quantity, some broader than others, i.e.
including a wider range of financial instruments.
For the following definitions, a series of simplification has been taken to keep things easy. Moreover, there exist significant international differences in definitions, especially for broader money definitions (M2 and M3).
narrowest definition of money, the monetary base comprehends only
cash outside banks plus bank reserves, the latter including both cash
reserves held by banks and banks' deposits at the central bank.
Larger than the monetary base, M1 comprehends cash and current accounts in banks.
is M1 plus the savings account.
is M2 plus other liquid liabilities of monetary financial institutions.
although a largely accepted image of money doesn't associate it to interest-bearing,
some definitions do comprehend interest-bearing assets.
distinction is between nominal and real quantity of money, the
latter being equal to the former divided by price
level. In this way, real money dynamics becomes dependent on inflation.
This is particularly important, since inflation, in its turn, is dependent on nominal and real quantity of money, too.
depositors, banks, financial and public institutions play a crucial
role for broad money aggregates.
money quantity, i.e. the national quantities of money converted in one
common currency at the prevailing nominal exchange
rates, is completely out of control.
With respect to the general economic climate, a booming economy usually exhibits a high growth of money quantity. By contrast, in hyperinflation, real money is drastically squeezed.
High growth rates in nominal money quantity, if clearly exeeding nominal
GDP rates, can exert inflationary pressures.
economic agents base their expectations about future inflation
on the money quantity, one would expect the present inflation rate boosted
by money quantity growth. But this is dependent on how present prices
are influenced by mere expectations.
In many empirical
instances, a certain increase of money quantity have turned out to be
conducive to growth in real GDP.
Many short run acceleration or deceleration of the money quantity remain without any noticeable effects on other variables.
Nominal money quantity has always grown, apart from few pathological
events. Real money quantity has grown most of the time.
In hyperinflation episodes, real quantity of money sharply fell and remained at low levels for a long time.
Nominal money quantity is usually pro-cyclical, sometimes leading real GDP peaks.