Explain what is meant in macroeconomics by the terms money and bonds Explain the elementary theory
Two important stores of wealth are bonds and money. These two items are substitutes, as money is used to purchase bonds and bonds are redeemed for money. Money is the modern medium of exchange and the standard unit in which prices and debts are expressed. Basically money serves four major functions – medium of exchange, store of value, unit of account and a source of deferred payment. Money can consist of currency and bank deposits and typically does not pay an explicit rate of interest. ... a bond pays or earns the nominal rate of interest, but a bond cannot be used for transactions (unlike money). Money demand for the economy as a whole depends on the overall level of transactions in the economy and on the interest rate. ... Thus using this information we can obtain the equation of the relation between the demand for money (Md) ; nominal income (Y) and the interest rate L(i) as:- Md= $YL(i) We can now use this formula to help us derive the relationship of the velocity of money. ... we get: - Md / $Y = L(i) Now the term of the left side of the equation (Md / $Y) is the ratio of money demand to nominal income. Or it can be read as the amount of money people want to hold in relation to their income, as L(i) is a decreasing function of the interest rate.