Money and near money:

Money can be referred to as one of the greatest innovations of the human society.Money is not needed for its own sake as one needs food, clothes and a house forliving.  Money is needed to mediate transactions.  It has purchasing power whichenables us for exchanging goods and services.  So this makes money a uniquecommodity.

By reducing transaction costs and thereby encouraging more trade, it can be arguedthat money allows the development of specialization of labor that is necessary forrapid economic growth.  Thus without money, all must be largely self-sufficient ashappens in primitive and tribal societies.

Today we are all familiar with money in our day-to-day transactions.  Perhaps theoldest and simplest role of money has been the 'medium of exchange' for all economictransactions as it acceptable to everybody. Besides this money is the commonlyused means of transferring purchasing power. It does not need to be converted intosomething else before it can be spent or used for settlement of debt.  What makesmoney 'money' is the belief held by everyone that it will be accepted as such by allothers in the economy.

In all money serves  four important functions for any society: Medium of Exchange,Unit of Value, Standard of Deferred Payment, and Store of Value. 

The way to examine the financial system is by imagining a satellite image. We beginby looking at it from 100 kilometres out. From this distance we can only see themajor players and the main parts of the system. We then move in and are able todifferentiate smaller and smaller details. This idea goes a long ways in explainingwhat we will be doing in this course as well as successive units

The study of money is an extremely important part of both economics and finance.There is significant overlap between monetary and financial system of an economy.The two interact with each other and have strong influence on the macroeconomicand financial sector performance of the economy. Research has found money (andfinance) to play an important role in the determination of aggregate output, theaggregate price level, the rate of inflation, and the level of interest rates.