Macro9 Essay Example | Topics and Well Written Essays - 1000 words

Macro9 - Essay Example ‘Store of value’ is a term that intrinsically refers to an instrument which can be saved today with the faith that a commodity of equivalent value could be obtained in lieu of the sum at some future period. In other words, possessing a fixed sum of money X today would mean the possessor’s purchasing power amounting to X, as long as she keeps it to herself, i.e., the value of this amount X is assumed not to depreciate (Hirshleifer, Glazer & Hirshleifer, 2005, p. 442). However, post the tumultuous phase of the global financial community, such a term is no longer applicable as money saved today is seldom expected to possess the same value tomorrow. This is especially so due to the policies of the central bank of any economy that brings changes to the value of money according to the demands of the prevailing economic situation. During recessions, value of money is found to grow higher while it deteriorates during times of inflation. In the latter phase for instance, t he same amount of money X can buy a much lower quantity of goods than it could have during the earlier period. In such a scenario, it is safer for the economists to assume a definition of money that hints towards the inclusion of relatively illiquid assets, i.e., those which cannot be circulated as smoothly as others and not readily accepted as modes of payments. In such cases, there longer exists any motive behind increasing the supply of money. According to the identity underlying the Quantity theory of money, Normally, during times of inflation, purchasing powers of people fall, so that T falls in value. On the other hand, recessions enhance the purchasing power of people so that T rises. Hence, assuming the product of P.T to be constant, movements in V are bound to be reflected through inverse movements in M (Minsky, 2008, p. 125). Thus, it is safer to include those goods within the sphere of money which have a low velocity (V), since they also ensure a more-or-less constant supply of