Question

The economic meaning of money is considerably different than what is usually referred to when this term is used in various contexts by the general public. Clearly explain what distinguishes ‘money’ from other financial assets by considering, among other things, the issues of liquidity and transactions costs.

Answer 1

Answer:- Anything through the medium of which goods and services and all other assets get exchanged, is treated as money. Money is constituted by currency which is comprised of the coins and currency notes issued by the central bank and the government of a country.

A liquid asset is the asset that can easily be converted into cash in a short period of time.In economics the demand deposit by the commercial bank is also considered as equivalents to money as they are readily accepted as the means of payment. The example of liquid assets are- money market assets, marketable equity securities (stocks), marketable debt securities, exchange traded funds, inveentory etc.

Transaction cost are the cost incurred when buying or selling a good or services. Transaction cost is a payment that banks, brokers and labourer receive for their roles.

*Money is tangible in general form. But when it comes to economics money sometimes is not tangible.

*With money we can buy anything we want instantly. but in case of financial assets there are only few things that we can buy. To buy every little thing in this earth we have to convert a financial asset into real money.

*Money doesn't include any transaction cost to buy any goods and services whereas financial asset does include transaction cost before buying any goods and services.

*Money is acceptable to everywhere and by everyone. Financial assets are not acceptable by everyone.

*If the value of money remain same then the amount of money also remain same. In case of financial assets keeping value of money constant the amount of money on a financial assets increases.