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\u201cYou can\u2019t eat it, drink it or use it directly for anything.\u00a0 It\u2019s a poor substitute for wood when starting a fire.\u00a0 And yet we all work our butts off, 9-to-5, for it. Money. You know, that thing that really makes the world go round.\u201d<\/strong><\/p>\n Money<\/strong><\/p>\n You know, that thing that really makes the world go round.\u00a0But let\u2019s start by taking a step back.\u00a0 What is money?\u00a0 How does it work?<\/p>\n Money is generally considered an object that circulates widely as a means of payment.\u00a0 Broken down further, there are actually two types of money: commodity money and fiat money.\u00a0Today, use of commodity money can be seen in prison.\u00a0 There, cigarettes can be used to trade for goods and services but it can also be consumed for ones utility.\u00a0 Then there is fiat money (i.e. a form of money, like a $20 bill, declared as legal tender by the government), which is intrinsically useless and does not have any direct utility.\u00a0 So then why would anybody want to hold fiat money?<\/p>\n Money has three functions: it\u2019s a store of value, a unit of account, and a medium of exchange.\u00a0To act as a store of value, money must be able to be reliably saved, stored, and retrieved.\u00a0A unit of account is a monetary measurement of the market value or cost of goods, services, or assets.\u00a0 It gives meaning to profits, losses, liability, or assets.\u00a0This problem lies in the improbability of the wants, needs, or events that cause or motivate a transaction occurring at the same time, same place and by the same people.\u00a0 For instance, an economics professor may have economics lessons to offer but in exchange would like to purchase a car.\u00a0 However, the student that would like to purchase a lesson cannot offer a car in return.\u00a0 This dilemma causes inefficiencies in the economy and leads us back to reasons as to which people prefer to hold money (as they can use it for any purpose).<\/p>\n The increased buying power, freedom, and control consumers have using money is what motivates and maintains fiat money. In fact, let\u2019s assume for a second that we do not have money to use as a means of exchange and we revert back to the barter system.\u00a0 Let\u2019s explore the consequences.\u00a0As individuals partake in fewer economic transactions the economy gets closer to what is called autarky.\u00a0 This represents a state when individuals are unable to make mutually beneficial trades and as a result each individual can only consume what he or she produces and nothing else.\u00a0Consumer theory holds us to that consumers prefer to have diversity in their consumption.\u00a0However, since the barter system brings us closer to autarky due to restrictions in trade, that means that farmer Joe will have lower variety of goods and services which translates into lower utility in his lifestyle.\u00a0 Therefore, when Joe is faced with the option of holding money versus barter, he will choose money.shelter, meat and furniture.<\/p>\n But what is it about today\u2019s fiat money\u2014these easily destroyable pieces of paper\u2014that makes it so valuable?\u00a0Simply our belief in its value.\u00a0If one believes that fiat money will not be valued in the future, then fiat money will have no value in the present.\u00a0 No one would be willing to give up goods and services for money.\u00a0 If people\u2019s belief in the value of money disappears, it becomes a self-fulfilling prophecy.\u00a0So what happens when our belief in (fiat) money is shaken?Inflation is a good example of something that deteriorates people\u2019s belief in the value of money.\u00a0 If in the next period your money is worth less, you will be inclined to hold less of it.\u00a0 Therefore, inflation is one of many determining factor in how much money people would like to hold.<\/p>\n \u0397 Manager\u2019s Office Financial Team<\/strong><\/p>","protected":false},"excerpt":{"rendered":" Why People Love Money Business Advices \u201cYou can\u2019t eat it, drink it or use it directly for anything.\u00a0 It\u2019s a…<\/p>","protected":false},"author":1,"featured_media":4467,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":""},"categories":[102],"tags":[],"yoast_head":"\n
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