On the Definition of Money

Abstract

As the function of Money, we can consider the following three functions of money that is (1) the function as a unit of account, (2) the function as a medium of exchange, and (3) the function as a store of value. The Former is the abstract function of money, and the latter two are the phenomenal functions of money. The classical school proposing Gold Standard recognized that money had three functions and the important roles in the real world. Rather because they considered that the stability of value of money was important in real world as a midium of exchange and a store of value, they were eagering in the stability of value of money by Gold Standard. Nevertheless, clasical school is called to have the moneyveil view and the classical dichotomy. In classical economics, relative prices and the rate of interest are determined in real economy and the demand for money and supply of money have less effect on them. While the supply of money have some effect on the absolute price only, with no effect on real facters through the rate of interest. Monetary analysis of classical school shows itself in the Quantity Theory of Money and lays stress on the medium of exchange as the function of money. Now, we can show a simple model as following I(r)=S(y9r) (1) M=PxL(y,r ) (2) I: investments, S : savings, y: real income, r : the rate of interest, M : money supply (exogeneous variable), Pethe general price level, L : real demand for money. Equation (1) shows the equilibrium of production market, and Equation (2) shows the equilibrium of money market. There are only 2 equations for 3 variables ( y , r, P)9 therefore we have to add one more equation to get a complete system. M. Friedman proposed that classical model add y=y0 ... (3) and Keynesian model P= P0 . . . (4). Firstly we consider classical model. Substituting (3) into (1), we have the equilibrium rate of interest r0. In this case, M is indifferent from the decision of r0. Substituting r0 and (3) into (2), we have the equilibrium price level P0. Thus M have some effect on General Price level only, with no effect on real economy. Therefore it is called that they have the money-veil view and the classical dichotomy. Then equation (2), replacing income velocity V=y/L ( y , r), is simply the classical quantity equation MV=Py ...(§). By them we can