By Sanjay Rode
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Medium of exchange Money is used in all transactions. The value of all the commodities and services are converted into money. Therefore now a day’s commodities are not exchanged for commodities but money is paid for each commodity in exchange. Therefore all human beings carry cash and pay the amount of commodity in money terms. Thus money is used as a medium of exchange. 2. Unit of account Money is used as a medium of exchange. It is a scarce commodity. Therefore money has to be accountable. A detail record is kept of money paid and money received.
5 Money multiplier Money multiplier is mainly influenced by the high powered money. High powered money is defined as the currency and bank deposits. The money supply influences the currency and the bank deposits. The contractionary monetary policy influences money available to the people. The money multiplier is therefore defined as the ratio of stock of money to high power money. 8 High power money in economy &XUUHQF\5HVHUYHV &XUUHQF\'HSRVLWV 0RQH\VWRFNP High power money consists of the upper portion of the figure that is currency and reserves.
The decline in prices due to competition reduces the profit margin. The investment and profit does not match each other. Therefore, investment in the future period is affected. Thus, a recession stage is observed in the economy. Decline in the investment reduces the employment opportunities and the level of income declines in the economy. The income declines further and it comes again at the original level. In the long run, expansionary monetary policy is ineffective. The interest rate (I) and income (Y) remains unaffected in long run.