(a) What is (i) commodity money? (ii) token money? (iii) fiduciary issue? (iv) quasi money? (b) State any four functions of money.

Answer Details

(a) Types of money.

• (i) Commodity money. Money whose material has intrinsic value of its own and can be used as an ordinary commodity as well as a medium of exchange, for example gold, silver, cowries or salt. Its value as money is close to its value as a good.
• (ii) Token money. Money whose face (nominal) value is greater than the value of the material from which it is made, such as coins and notes; it is accepted because of law and public confidence, not the worth of its metal or paper.
• (iii) Fiduciary issue. The part of a country's note issue that is not backed by gold or other reserves but rests only on public confidence and the credit of the government or central bank.
• (iv) Quasi money. Near money: assets that are not money themselves but can be turned into money quickly and easily, such as time (savings) deposits, treasury bills and bills of exchange.

(b) Four functions of money.

1. Medium of exchange - it is generally accepted in payment for goods and services, removing the difficulties of barter.
2. Measure (unit) of value - it provides a common yardstick in which the prices of all goods and services are expressed.
3. Store of value - purchasing power can be kept in the form of money and used later.
4. Standard of deferred payment - it allows debts and future payments to be fixed and settled in money terms.

Examination reminder: keep token money (face value above material value) distinct from fiduciary issue (unbacked notes), as these two are commonly confused.