Interest Rate Determination

What Is Money?

Learning Objective

1. Learn why money exists and what purpose it serves.

The money supply in a country refers to a stock of assets that can be readily used to purchase goods and services. An asset is anything that has value. Anything that has value could potentially be used in exchange for other goods, services, or assets. However, some assets are more easily exchangeable than other assets.

Examples of assets include currency, checking account balances, stocks, bonds, whole life insurance policies, real estate, and automobiles. Currency - dollar bills in the United States, pounds sterling in Britain, and pesos in Mexico - is an asset that is readily exchangeable for goods and services within its respective countries. In contrast, real estate is an asset that is very difficult to use to buy goods. For example, no grocery store would accept ownership of a few square feet of your house in exchange for your weekly groceries. The idea of this transaction is unimaginable. Yet these two extreme cases can help us understand the distinction we make between assets classified as money and those not considered money. Most textbook definitions of money begin by defining several of money's key features.