GLOSSARY. · Medium of exchange is the most important function of money

· Medium of exchange is the most important function of money. This means that money is widely accepted in payment for goods and services.

· Unit of account is another important function of money. Money is used to measure relative values by serving as a common yardstick for valuing goods and services.

· Store of value is the ability of money to hold its value over time. Money is said to be highly liquid, which means it is readily usable in exchange.

· The demand for money in the Keynesian view consists of three reasons why people hold money: (1) Transactions demand is money held to pay for everyday predictable expenses. (2) Precautionary demand is money held to pay unpredictable expenses. (3) Speculative demand is money held to take advantage of price changes in nonmoney assets.

· An excess quantity of money demanded causes households and businesses to increase their money balances by selling bonds. This causes the price of bonds to fall, thus driving up the interest rate.

· An excess quantity of money supplied causes households and businesses to reduce their money balances by purchasing bonds. The effect is to cause the price of bonds to rise, and, thereby, the rate of interest falls.

· Monetarism is the simpler view that changes in monetary policy directly change aggregate demand and thereby prices, real GDP, and employment. Thus, monetarists focus on the money supply, rather than on the rate of interest.

· Monetary base is the stock of an economy’s most liquid financial assets.