Characteristics of money to function effectively

ByJevons's four functions of money were summarized in the couplet: One of these arguments is that the role of money as a medium of exchange is in conflict with its role as a store of value: The term "financial capital" is a more general and inclusive term for all liquid instruments, whether or not they are a uniformly recognized tender.

Characteristics of money to function effectively

It does this by facilitating funding, liquidity and price discovery, while also providing effective risk management, payment and some monitoring services. The Inquiry believes the financial system achieves this most effectively when it operates in an efficient and resilient manner and treats participants fairly.

This occurs when participants fulfil their roles and responsibilities in a way that engenders confidence and trust in the system.

Functions of Money

The financial industry makes a considerable contribution to employment and economic output in Australia. However, the Inquiry believes the focus of financial system policy should be primarily on the degree of efficiency, resilience and fairness the system achieves in facilitating economic activity, rather than on its size or direct contribution such as through wages and profits to the economy.

The Inquiry is concerned with three distinct, but interrelated, forms of efficiency: Operational efficiency — where financial products and services are delivered in a way that minimises costs and maximises value. This largely depends on how effectively firms deploy labour, capital and technology, and the regulations with which firms comply.

Strong competition, both from new entrants and incumbents, encourages firms to innovate and increase operational efficiency to survive and prosper.

This can be seen in the ongoing industry focus on deploying new technologies in the Australian financial system to improve the quality and reduce the cost of products and services. Good policy-making can also assist operational efficiency by providing a stable regulatory environment and well-designed regulation that takes into account its likely effect on industry.

Functions of Money

Allocative efficiency — where the financial system allocates financial resources to the most productive and valuable use. Central to achieving allocative efficiency is the ability of prices to adjust freely to give participants information about the value and risk of various financial products and services.

Prices help allocate financial resources to productive uses. Prices also help allocate risks to those most willing and able to bear them, such as through insurance or derivative contracts. For prices to play this role, market participants require access to comprehensive information about the risks and expected returns of financial products.

Allocative efficiency can be hampered by ineffective disclosure, government guarantees explicit or implicit and tax policies that distort price signals. Dynamic efficiency — where the financial system delivers price signals that induce the optimal balance between consumption and saving deferred consumption.

A resilient system does not preclude failure, nor necessarily imply price stability. Rather, a resilient system can adjust to changing circumstances while continuing to provide core economic functions, even during severe but plausible shocks.

In a resilient system, individual institutions in distress should be resolvable with minimal costs to depositors, policy holders, taxpayers and the real economy. Occasional episodes of financial instability are inherent in a market economy and are typically associated with asset price volatility, high levels of leverage, under-pricing of risks and mismatches between assets and liabilities.

History suggests that events of instability will continue to occur, but their timing, severity and causes cannot be reliably predicted. Land and property speculation in the s and s led to an economy-wide depression, with real per capita GDP falling 20 per cent and around half of the Australian trading banks closing.

Severe financial shocks have broad negative consequences, both for individuals and for the general economy. Depositors, policy holders, creditors and shareholders of affected institutions can lose money.

Characteristics of money to function effectively

Credit and risk management services may be scaled back. In extreme circumstances, payments mechanisms may break down. Confidence in the financial system can evaporate, causing contagion to spread from distressed institutions to the rest of the system.

General economic growth slows, unemployment rises and standards of living fall. Because of this, it is critical that the Australian financial system is resilient. Fair treatment Fair treatment occurs where participants act with integrity, honesty, transparency and non-discrimination.The four primary characteristics of money are: (1) durability, (2) divisibility, (3) transportability, and (4) noncounterfeitability.

Although a number of items or assets have served as money, those that best match these four characteristics are the ones that best function as money, the ones that best operate as a medium of exchange. According to the Bank of England, in a modern economy, money is a type of IOU, but one that is special because everyone in the economy trusts that it will be accepted by other people in .

The Four Basic Functions of Money The Functions and Characteristics of Money Next Lesson. What is the Gold Standard? - Definition & History ; What is the Dow Jones Industrial Average.

money characteristics: The four primary characteristics of money are: (1) durability, (2) divisibility, (3) transportability, and (4) noncounterfeitability. Although a number of items or assets have served as money, those that best match these four characteristics are the ones that best function as money, the ones that best operate as a medium of exchange.

The six characteristics of money are durability, portability, acceptability, limited supply, divisibility and uniformity. Money acts as a unit of account, a medium of exchange and a store of value. Durability means that dollar bills or coins are easily replaceable should they become damaged.

Characteristics of a well-functioning financial system The financial system plays a vital role in supporting sustainable economic growth and meeting the financial needs of Australians.

It does this by facilitating funding, liquidity and price discovery, while also providing effective risk management, payment and some monitoring services.

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