Money and Interest Rate - Money and its uses
3 important questions on Money and Interest Rate - Money and its uses
Money has three principal uses:
- Medium of exchange: an asset used in purchasing goods and services (otherwise all economic transactions would have to be in the form of barter, which is the direct trade of goods or services for other goods or services).
- Unit of account: a measure of economic value.
- Store of value: an asset that serves as a means of holding wealth.
In economics the word money is redefined to mean:
Anything that serves as a medium of exchange (including different kinds of assets).
In the Eurosystem, the European Central Bank (ECB) uses three definitions to define how much money (defined as financial assets usable for making purchases) there is in the economy at any given time:
- M1: sum of currency outstanding and balances held in current accounts.
- M2: all the assets in M1 plus some additional assets that are usable in making payments but are at greater cost or inconvenience than the use of currency or cheques.
- M3: all assets in M2 plus marketable securities with a high degree of liquidity and price certainty.
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