Money VOŠ – 3. ročník – 1. semestr Sources: M. Kaftan, l. Horáková: English in Economics

© Lenka Lexová What is money? any goods that function as a medium of exchange is socially and legally accepted in payment for goods and services in common usage, money refers more specifically to currency

© Lenka Lexová Functions of money a medium of exchange –enables people to exchange goods and services for commodities –it is a means of transactions a unit of account –a measure of value which helps to compare the value of various goods and services a store of value –a form of money or financial capital that is saved, stored for later use

© Lenka Lexová Evolution of money Direct exchange of goods Commodity money Precious metals – gold, silver Paper money Fiat money Credit money

Direct exchange of goods –exchange of goods for another goods of equal value Commodity money –especially chosen goods with given value accepted by the society –e. g.: cattle, shells, salt, tobacco etc. Precious metals – gold, silver Paper money –their value was originally based on the amount of gold it contained © Lenka Lexová

Fiat money –its value is agreed on by the government regardless of its content of precious metals –banknotes are protected against counterfeiting Credit money –a financial instrument that cannot be repaid immediately –e. g. bonds, money market accounts © Lenka Lexová

Money supply - it is the amount of money which is available for purchasing goods or services at a certain moment - it helps to indicate inflation or growth - it consists of: Transaction money Near money

Transaction money –used by firms, households and individuals –coins, notes, bank money stored in current accounts (Europe) or in checking accounts (USA) Near money –some time is needed before this means of payment can be turned into cash or another type of transaction money –term deposits, credits, mortgages, bonds etc. © Lenka Lexová

Interest a fee paid on borrowed money the percentage of the principal which is paid as fee - the interest, over a certain period of time, is called the interest rate money earned by depositing in long-term or short-term deposit accounts

© Lenka Lexová Exchange rate expresses the price of a currency which is traded on the foreign exchange market the currency tends to: –appreciate in times of economic growth –depreciate in depression –fluctuate as a result of government intervention the currency can be undervaluated or overvaluated

a floating exchange rate is a result of the daily fluctuations of the exchange rate; appreciation and depreciation of the currency are affected by the market a managed floating exchange rate is a result of government intervention (regulations) done in order to stabilize the exchange rate a fixed exchange rate – the government changes the rate, the rate of the local currency is fixed to one or more foreign currencies © Lenka Lexová

Purchasing power tells how many goods it is possible to buy with one currency unit purchasing power parity compares the purchasing power of different currencies in their home countries for a given basket of consumer goods helps to compare the standards of living of two or more countries

© Lenka Lexová Monetary policy is the process by which a government, central bank, or monetary authority regulates the money supply to achieve specific goals tries to ensure economic growth in an environment of stable prices, maximum employment, moderate long-term interest rates

Instruments of monetary policy Tight money –used in times of inflation –reduces the money supply and limits investments Easy money –used in times of recession –activates growth of aggregate demand Interest rates Loan terms Minimum reserve requirements Discount rates Open market operations

© Lenka Lexová Hot money are funds which flow into a country to take advantage of a favourable interest rate and therefore get higher returns it is speculative financial capital deposited on a short-term basis it influences the balance of payments and strengthens the exchange rate of a currency