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Introduction
If financial institutions (FIs) were non-existent, then households would either hold cash or invest in securities issued by corporations. Some securities such as mortgages, bonds, and corporate stocks are long-term and have low liquidity (Mayo 2015). Therefore, many households prefer to hold cash and use it to finance consumption expenditures. On the other hand, lenders would be required to monitor the activities of borrowers to ensure that they make wise investments. The lack of information results in an increase in the price risk of transactions especially on the secondary markets. In that regard, many households would prefer to hold their cash. If they invested in securities issued by corporations, they would be unable to monitor how their money was being. It is costly to monitor the actions of corporations because monitoring requires a lot of time, effort, expertise, and money to collect the information necessary to determine whether the money is being used wisely (Mayo 2015). The up-front information costs encountered by lenders include costs of identifying potential borrowers, assessment of risk, and investment opportunities. The monitoring costs, liquidity costs, and price risk force households to leave the activity of monitoring corporations to others (Mayo 2015).
Money
Characteristics and Functions
Money has several characteristics that make it an important medium of exchange for goods and services. Money must be durable, divisible, portable, valuable, hard to counterfeit, and acceptable by a population (Lannoye 2015). It is important for money to last by withstanding everyday wear and tear due to its constant use and handling. Money should also be portable; it must be easily carried around and convenient. Moreover, it must be easy to use. Money must be divisible into smaller units and denominations to make the purchase of goods and services easy (Lannoye 2015). Money must be hard to counterfeit; it should not be easily faked or copied. Money should be accepted by the people so that it can be used as the medium of exchange. Finally, it must be valuable. It should maintain its value over a long time (Lannoye 2015). In that regard, the value of a certain denomination should be constant over time. Money is a medium of exchange, it is a measure of buying on credit, it is a store of value, and it provides a standard of value (Davidson & Davidson 2016). Money facilitates the exchange of goods and services between producers and consumers. Money is a store of value because it can be saved now and used to purchase se goods and services in the future. It is a unit of account because it allows people to express the value of products and services and compare the value of different items (Davidson & Davidson 2016).
Importance
Money is important because it is the main medium that is used to acquire basic human needs including food, clothing, and shelter (Davidson & Davidson 2016). Money allows people to invest, buy goods and services, get access to quality medical care, take vacations, and purchase the items they need to improve the quality of their lives (Davidson & Davidson 2016). It is very difficult to live a fulfilling life without money because the majority of the products and services used require money to purchase. Money also allows people to pursue their hobbies and passions, support the charities of their choice, educate their children, and enjoy the luxuries of life. Money allows people to secure their futures through investment, improvement of health, pursue higher education and start businesses.
Reference List
Davidson, G & Davidson, P 2016, Economics for a civilized society, Routledge, New York.
Lannoye, V 2015, The history of money for understanding economics, Vincent Lannoye, New York.
Mayo, H 2015, Basic finance: an introduction to financial institutions, investments, and management, Cengage Learning, New York.
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