A Monetary System is defined as a set of policies, frameworks, and institutions by which the government creates money in an economy. Such institutions include the mint, the central bank, treasury, and other financial institutions. There are three common types of monetary systems – commodity money, commodity-based money, and fiat money.
This is made up of precious metals or other commodities that have intrinsic value. In order words, the monetary system uses the commodity physically in terms of currency. This form of money retains its value even if it’s melted down. For example, gold and silver coins have been commonly used throughout history as a form of money.
2. Commodity-based Money
This draws its value from a commodity but doesn’t involve handling the commodity regularly. The notes don’t have tangible value but can be exchanged for the commodity it is backed by. For example, the US Dollar used to draw its value on gold. This was known as the Gold Standard.
3. Fiat Money
In this monetary system the currency, which by government decree is legal tender, i.e., that the government guarantees the value of the currency.
Today, most monetary systems are fiat money because people use notes or bank balances to make purchases. Fiat money is made up of paper currency or a base metal coin. However, today, most of fiat money is in the form of bank balances and records of credit or debit card purchases.
Uses of Money
1. Medium
Money is used as a means of payment or a medium of exchange and therefore eliminates the coincidence of needs problem that is created by a barter system. The coincidence of needs requires that two parties want what the other person is willing to trade, and thus makes it difficult to trade.
2. Measurement
It is also a standard unit of measurement that can be used to price things and to compare value. For example, a book costs $150, a meal costs $5, and a long-distance call costs $0.10/min. To compare their value, we can say one book = 30 meals = 1500 minutes on a long-distance call.
3. Value
Money can be used to store value, and thus it becomes an asset itself. However, money may not be a good store of value since it loses value over time due to inflation.
Critics have argued that MMT is not a theory because there is no mathematical model. Others have argued that there is a theory but that there is nothing new and, even if there is, it is not valid, it is misleading, and it pushes the logic too far.
Economists address these three questions: (1) What goods and services should be produced to meet consumer needs? (2) How should they be produced, and who should produce them? (3) Who should receive goods and services? The answers to these questions depend on a country's economic system.
Another problem is that inflation does not work as MMT describes. According to MMT, government should run money-financed budget deficits until all real resources are employed. At that stage, the economy becomes supply-constrained and policy should step on the budget brake to prevent emergence of inflation.
MMT has a flawed model of inflation that overestimates the importance of economic slack. MMT argues that “slack,” the amount of resources not being used at a given time, is what determines inflation.
Economic systems answer three basic questions: what will be produced, how will it be produced, and how will the output society produces be distributed?
The central or fundamental questions of economics are: what to produce, how to produce, and for whom to produce. So, the effect of any addition or subtraction on the on-going situation is not a fundamental question.
Why is Capitalism the Greatest? Capitalism is the greatest economic system because it has numerous benefits and creates multiple opportunities for individuals in society. Some of these benefits include producing wealth and innovation, improving the lives of individuals, and giving power to the people.
The term "invisible hand" first appeared in Adam Smith's famous work "The Wealth of Nations" to describe how free markets can motivate individuals, acting in their own self-interest, to produce what is societally necessary.
In order to meet the needs of its people, every society must answer three basic economic questions: What should we produce? How should we produce it? For whom should we produce it?
Macroeconomics is the study of the performance of the national and global economies. Two big questions summarize the scope of economics: How do choices end up determining what, how and for whom goods and services get produced?When do choices made in the pursuit of self-interest also promote the social interest?
MMT could also lead to increased political influence over the economy. If governments can create money to fund public programs, they may be tempted to use this power to buy votes and manipulate the economy for their own benefit. This could lead to an increase in corruption and cronyism.
MMT is also strongly opposed by members of the Austrian school of economics, with Murray Rothbard stating that MMT practices are equivalent to "counterfeiting" and that government control of the money supply will inevitably lead to hyperinflation.
Some economists warn that such behavior can lead to a lack of discipline and, if not managed properly, cause inflation to spike, eroding the value of savings, triggering uncertainty, and discouraging firms from investing, among other things.
Economists disagree about how quickly and how proportionately prices adjust after a change in the quantity of money, and about how stable V and T actually are with respect to time and to M.
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