Functions of Money and Supply of Money

Functions of Money and Supply of Money

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UNIT TWO

Functions of Money and Supply of Money This Unit consists of the following sections: • Section A, which deals with the functions of money, • Section B, which deals with the supply of money, and • Section C, which will help you to review what you have learnt in Sections A and B Upon completing this unit, you will understand how money works and how much of it is in the economy. Section A THE FUNCTIONS OF MONEY 1. Match the English and Hungarian words English (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

actually common denominator deferred payment fall back on item legal tender medium of exchange refer to refuse store of wealth unit of account worthless

Hungarian A. B. C. D. E. F. G. H. I. J. K. L.

árucikk, tétel csereeszköz elszámolási egység értéktelen folyamodik vmihez kincsképző közös nevező ténylegesen, valójában törvényes fizetőeszköz utal vmire utólagos fizetés vonakodik, visszautasít

2. Now read the first passage about The Functions of Money In the previous unit you read about different forms of money, but not very much about what money actually is. Some economists define money as “anything that is generally accepted in an economy as a medium of exchange, a unit of account, a store of wealth and a standard of deferred payments.” Let us look at those functions one by one. Medium of Exchange People pay money for goods and services. Workers exchange labour services for money. In other words, money is freely acceptable in exchange for goods and services. Its first function then is as a medium of exchange.


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Today, coins and notes issued by the government are “legal tender”. This means that government issued coins and notes have to be accepted in exchange for goods and services. Sometimes, however, especially in times of war, even legal tender money can become worthless if people refuse to exchange goods and services for it. In such cases, people fall back on barter, or pay with gold or use a hard currency like the US $ or the Euro. Measure of Value This function of money is the “common denominator” function. It helps us to compare the values of different items. It is easier to remember that, in Budapest, a bottle of wine costs about $1.30 or that a monthly bus ticket costs $13 than it is to remember that one monthly ticket equals 10 bottles of wine. And it is possible to draw conclusions from two suits in a shop window, one priced at $200, the other $75: the first suit is more expensive, so it is probably of better quality than the second. This function is often referred to as a unit of account. 3. Match the English and Hungarian words English (1) (2) (3) (4) (5) (6) (7) (8)

convertible ease interest loan measure purchasing power repay save

Hungarian A. B. C. D. E. F. G. H.

visszafizet vásárlóerő mér megtakarít könnyűség kölcsön kamat átváltható

4. Now read the second passage about The Functions of Money

Store of Wealth This function simply means that if you have some medium of exchange, you might want to save it for use at a later time. If you have $100 in the bank, you know that this has a certain value and is easily convertible into actual money. Ease of convertibility is known as liquidity. This function is often referred to as a store of value, sometimes as a store of purchasing power.


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Standard of Deferred Payment When you borrow money, the amount you have to repay in the future is measured in the currency of your country. (In most countries, however, it is possible to get loans in dollars, euros or yen.) For example, if you borrow $1,000 over 2 years at 10% interest, then the repayments will be $1,000 + $200 interest = $1,200 / 24 = $50 per month. The repayments are expressed in money, i.e. money is a standard of deferred payment. 5. Find the opposite of the words (1) similar (2) easy (3) rise, grow (4) refuse (5) impossible (6) forget (7) valueless (8) lend (9) past (10) last

............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ...............................

6. Answer these questions about the different functions of money (1) What do workers exchange for money? (2) What do people pay money for? (3) How can you define the relationship between money and goods and services? (4) What can happen to legal tender money in times of war? (5) How can money help us to compare the values of different goods? (6) What would happen to the value of your money if you kept it at home? (7) How would you define liquidity? (8) How are debtors’ future repayments measured? 7. Now match the words in the two columns then translate the Hungarian terms below into English Column A medium measure store store unit store standard

Column B value account exchange of wealth deferred payment value purchasing power


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Hungarian terms: (1) elszámolási egység (2) csereeszköz (3) értékmérő (4) kincsképző [3 megoldás!]

(5) az utólagos fizetés mérőszáma

English translation: ......................................................................... ......................................................................... ......................................................................... ......................................................................... ......................................................................... ......................................................................... .........................................................................

8. Read the passages above again, then complete the column in English below. Translate them into Hungarian with the help of the Word List at the end of the Unit English: (1) generally ................................... (2) exchange labour ........................ (3) freely acceptable ....................... (4) legal .......................................... (5) common .................................... (6) ..................... the values of items (7) one monthly ticket .................... (8) draw .................. from two suits (9) easily ............ into actual money (10) ................ is known as liquidity

Hungarian: ........................................................ ........................................................ ........................................................ ........................................................ ........................................................ ........................................................ ........................................................ ........................................................ ........................................................ ........................................................

9. With the help of a dictionary, translate the following text into English Honfoglalás kori őseink ismerték a pénzt mint értékmérőt, de kereskedelmet nem folytattak vele. A Kárpát-medencében a X. században arab, bizánci és nyugat-európai pénzeket használtak. Pénzverésünk az államalapítással egyidős, Szent István király uralkodása idején - a szuverén uralkodó felségjogaként - indult meg az önálló magyar pénzverés.


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Section B THE SUPPLY OF MONEY

1. Match the words with the definitions Words: (1) sight deposit (3) deposit account (5) draw a cheque on an account (7) so long as (9) sufficient (11) supply

(2) current account (4) whereby (6) time deposit (US) (8) ensure (10) meet a demand (12) transfer

Definitions: A. take money out of an account with a cheque B. money in a bank a/c which the depositor can only get if he notifies the bank in advance C. allow, make it possible D. a bank a/c from which you can withdraw money at any time E. enough, adequate F. satisfy a need G. a bank a/c in which money does not earn interest (US: demand deposit) H. provide, sell I. according to which J. a bank a/c in which money earns interest K. if L. send money from one account to another

2. Now read the following passage The Supply of Money The supply of money, as determined by notes, coins and sight deposits, is often referred to as M1. In 2005, M1 in the US was as follows: Notes and coins $400 billion

Sight deposits $950 billion


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However, some doubt has been expressed as to whether M1 is really the total supply of money. The following example will explain. Kevin Dove works as a systems analyst in a small company. His financial position is as follows: 1) Cash (notes and coins) $50 2) Money in his current account (sight deposit) $750 3) Money in a deposit account (time deposit) $3,000 Item 3 cannot be drawn upon by means of a cheque, but Kevin has an arrangement whereby if he draws more from his current account than he has in it, then $500 will automatically be transferred from his deposit account. It is quite clear that his $3,000 in his deposit account can be considered by Kevin as money. It is because of the increasing use of deposit accounts as near money that economists believe that it is not only M1 which should be considered as the total money supply, but rather what has been called M3, which is M1 + time deposits. In 2005 in the US this amounted to: M1 $11350 billion

Time deposits $6500 billion

M3 $9500 billion

3. Now answer these questions concerning the passage above (1) What is M1? And M3? (2) Is M1 really the total supply of money? (3) What does Kevin do? (4) How much money does he have altogether? (5) How much of that is cash? (6) How can he use the money in his current account? (7) What will happen if he writes a cheque for $800?

4. Choose the correct words from the box to fill in the gaps in the sentences regard create

draw cash

proportion as

current deposits

Bank (1) .................... form the biggest (2) ..................... of money supply whether we are considering money supply (3) ..................... M1 or M3. As our example showed, people obviously (4) .................... bank deposits as money because they can (5) .................... cheques on them - at least on (6) ..................... accounts and some special kinds of time deposits. Banks can (7) ..................... more money, i.e. add to the money supply, by lending money to their customers. They can create new deposits so long as they ensure that they have sufficient (8) ..................... to meet any demands for cash.


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5. Try to change the following sentences using the clues below so that the meaning of the sentences would not change (1) Coins, banknotes and sight deposits are often referred to as M1. M1 is often used to refer .......................................................................... ....................................................................................................................... (2) Some doubt has been expressed as to whether M1 really is the total supply of money. Not everybody is certain .......................................................................... ....................................................................................................................... (3) Item three cannot be drawn upon by means of a cheque. Kevin Dove can't write ............................................................................. ....................................................................................................................... (4) Kevin has an arrangement whereby if he draws more from his current account than he has in it, then $500 will automatically be transferred from his deposit account. Kevin has agreed with his bank that if he overdraws his current account, the bank ............................................................................................................ ..................................................................................................................... (5) His $3,000 in his deposit account can be considered by Kevin as money. Kevin can ................................................................................................

6. The bar diagram below shows the Hungarian money supply in 1996. Try to find the English equivalents of the Hungarian terms, then match them with the figures under the bar diagram Hungarian A. kisvállalkozói betétek B. lakossági betétek C. bankrendszeren kívüli készpénz D. egyéb betétek E. vállalati betétek

English Q. other deposits W. corporate accounts X. small business accounts Y. household savings Z. cash not held in banks


26 HUF bn 1400 1200 1000 800 600 400 200 0 1

2

3

4

5

7. By now you should be able to translate the following text into English without using a dictionary A pénz szabadon átváltható árura, legfontosabb funkciója tehát az, hogy csereeszköz. Másodszor, a pénz értékmérő. A pénznek ezen kívül még kincsképző funkciója is van, sőt az utólagos fizetések mérőszáma is. A pénzállományt legegyszerűbben mint a pénzérmék, bankjegyek és látra szóló betétek összegét lehet meghatározni, ám nem szabad megfeledkeznünk a tartósan lekötött betétekről sem. Akár az M1-et, akár az M3-at tekintjük pénzkínálatnak, mindenképpen a bankbetétek alkotják a pénzállomány legnagyobb részét.

Section C SUMMARY Answer these questions (1) (2) (3) (4) (5) (6) (7) (8) (9)

What functions does money perform? Which seems to be the most important function? Why? How can you compare two different kinds of goods? How is money a standard of deferred payment? How is money “legal tender”? Why can we say that money is a store of wealth? Why are bank deposits regarded as money? How can banks increase the money supply? What forms the biggest part of the money supply of a country?


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WORD LIST a/c acceptable actual adequate altogether amount, -ed arrangement as long as burden cash common denominator consider,-ed convert, -ed convertible current account define, -d demand deposit (US) deposit account deposit receipt doubt draw conclusions from draw, drew, drawn a cheque on an account earn, -ed ensure, -d equal, -led gather, -ed generally acceptable hard currency heap, -ed up hint interest labour law legal tender lend, lent, ~ liquidity loan means, by ~ of measure of value measure, -d

számla elfogadható tényleges kielégítő, megfelelő összesen elér (egy összeget) elrendezés, elintézés; megállapodás, szolgáltatás amíg, amennyiben teher készpénz közös nevező vmilyennek gondol/tart vmit átvált átváltható folyószámla meghatároz nem lekötött betét betéti számla letéti igazolás kétség következtetést von le vmiből csekket állít ki egy számlára (pénzt) keres, jövedelmet szerez/hoz biztosít (pl. feltételeket) egyezik/egyenlő vmivel gyűjt általánosan elfogadható kemény valuta felhalmoz utalás kamat munka jog, törvény törvényes fizetőeszköz kölcsönad likviditás kölcsön segítségével értékmérő mér


28 medium of exchange meet, met, met a demand money supply notify, -ied proportion recognizable refer, -red to refuse, -d repay, repaid, ~ result, -ed in rise, rose, risen save, -d money sight deposit standard of deferred payment statement store of purchasing power store of value store of wealth sufficient supply systems analyst time deposit transfer, -red unit of account valueless whereby whereby worthless write, wrote, written a cheque

csereeszköz igényt/követelést kielégít pénzkínálat, pénzállomány értesít arány, rész felismerhető utal vmire visszautasít visszafizet vmit eredményez emelkedik takarékoskodik, pénzt gyûjt látra szóló betét az utólagos fizetés mérőszáma 1. számlakivonat 2. állítás, kijelentés kincsképző (a vásárlóerő tartaléka) kincsképző (az érték őrzője) kincsképző (a vagyon őrzője) megfelelő, kielégítő kínálat rendszerszervező lekötött betét átutal elszámolási egység értéktelen ami által ami által, aminek révén értéktelen csekket kiállít

Functions of Money and Supply of Money

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