Northern University of Business and Technology, Khulna.
41, 42 Majid Sarani, Khulna
Date: august 16, 2025
Department of Computer Science and Engineering,
Assignment on “functions of money, demand for money,
differences between central and commercial Bank”
Course Title: Economics.
Course Code: GED 2205.
Submitted by:
Submitted to:
Name: Samantha Rahman
Maksudul Hasan Pranto
Section: 4J Sadia Tasneem
ID:11230321566, 11230321567 Lecturer
Department of CSE, NUBTK Department of GED, NUBTK
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Index
1. Introduction: ................................................................................................................................ 3
2. Part 1: Definition and Functions of Money ................................................................................ 3
Defining Money: From Barter to a Medium of Exchange .............................................................. 3
Types of Money in Modern Economies: ........................................................................................ 4
Functions of Money: The Four Pillars: ........................................................................................... 5
3. Part 2: Briefly Discuss the Demand for Money ......................................................................... 7
Understanding Demand for Money: Beyond Just Spending: ......................................................... 7
Keynesian Motives for Money Demand: ........................................................................................ 7
Modern Implications and Critiques: ............................................................................................... 8
4. Central Bank Vs Commercial Bank ........................................................................................... 9
Bank: ............................................................................................................................................... 9
Central Bank: .................................................................................................................................. 9
Functions of a Central Bank: ....................................................................................................... 9
Commercial Bank: .......................................................................................................................... 9
Functions of a Commercial Bank: ............................................................................................... 9
5. Conclusion: .................................................................................................................................. 11
6. References: .................................................................................................................................. 11
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1. Introduction:
Money is one of those things we all use every day without really stopping to think about what it
truly is or why it exists. Imagine a world without it back to trading apples for nuts or shoes for
leather. That was the reality for much of human history, but as societies grew more complex, so
did our need for something more efficient. In this assignment, we’ll dive into the definition and
functions of money, drawing from the provided document on the evolution and types of money,
while also incorporating insights from broader economic theories. Then, we’ll discuss the demand
for money, focusing on Keynesian perspectives that explain why people hold onto cash instead of
spending or investing it all.
This topic fascinates us because money isn't just paper or digits on a screen; it's a social invention
that powers economies, influences decisions, and even shapes cultures. From ancient barter
systems to today's digital currencies like Bitcoin, money has evolved dramatically. I'll keep this
discussion grounded in the PDF's content, which emphasizes practical examples from economies
like Bangladesh, but I'll creatively expand with real-world examples and additional sources to
make it more comprehensive. Let's start with the basics: what exactly is money?
2. Part 1: Definition and Functions of Money
Defining Money: From Barter to a Medium of Exchange
At its core, money is anything that serves as a commonly accepted medium of exchange for goods
and services. In other word money is "the generally accepted commodity or commodities that can
be exchanged for goods or services," contrasting it sharply with barter, where goods are swapped
directly without any intermediary. In a barter economy, finding someone who wants exactly what
you have (and has what you want) is rare like a farmer trying to trade nuts for apples when the
other person only wants pants. This "double coincidence of wants" makes barter inefficient,
leading economists to introduce money as a solution.
Historically, money evolved to solve these problems. Early humans bartered goods like livestock
or shells, but as trade expanded, commodity money emerged—items with intrinsic value, such as
gold or silver coins. Over time, this shifted to representative money (backed by commodities), then
fiat money (government-issued with no intrinsic value), and now digital forms. For instance, the
history of money traces back over 5,000 years, from Mesopotamian shekels to modern
cryptocurrencies. In today's world, money isn't just physical; it's increasingly digital, like mobile
payments via apps such as bKash in Bangladesh or Venmo globally.
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Economists like John Maynard Keynes and others define money not just by what it is but by what
it does. So, we can say money is "the medium of exchange used by an economy, it is the commodity
ordinarily used in transactions that transfer ownership of goods and services." This aligns with
broader definitions: money is a system of value that reduces transaction costs and facilitates trade.
In essence, money is a social contrivance anything society agrees upon, from cowrie shells in
ancient Africa to blockchain-based Bitcoin today.
Types of Money in Modern Economies:
Money exists in three primary forms: commodity money, fiat money, and bank money, each
serving distinct roles.
1. Commodity Money: This is money whose value comes from the commodity itself. Gold
and silver have been the stars here for centuries because they're durable, divisible, and
scarce. Even today, in times of economic uncertainty, people turn to gold as a safe haven.
However, commodity money isn't practical for everyday use—imagine carrying gold bars
to buy groceries.
2. Fiat Money: Unlike commodity money, fiat money has value because the government
declares it legal tender, not because of its material worth. It is issued by governments or
central banks. In Bangladesh, this includes notes like 1, 2, 5, up to 1000 taka, with the
government issuing smaller denominations and the central bank handling larger ones.
Globally, most currencies are fiat, like the US dollar or euro. A key feature is the
government's monopoly on issuance, which helps control inflation but can lead to issues if
trust erodes, as seen in hyperinflation cases like Zimbabwe.
3. Bank Money: This is the most common form in modern transactions money in checking
accounts. About 90 percent of the money value of all transactions in Bangladesh are carried
out by writing a check. Checks are safer and provide better records than cash. Banks offer
demand deposits (withdrawable anytime) and time deposits (with interest but withdrawal
restrictions). In today's digital age, this extends to electronic funds like debit cards or online
banking.
Beyond these, modern economies include additional forms. Cryptocurrency like Bitcoin is a digital
asset using blockchain technology, not backed by any government but valued through supply and
demand. There’s also central bank digital currency (CBDC), like China’s digital yuan, blending
fiat with digital efficiency. These evolutions show how money adapts to technology, from barter
to apps that let you pay with a tap.
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Fig 1: types of money
Functions of Money: The Four Pillars:
Money isn't just for spending; it performs essential roles in any economy. We can list four key
functions: as a medium of exchange, a unit of value, a standard of deferred payment, and a store
of value. These make specialization and trade possible in complex societies.
1. Medium of Exchange: This is money's primary job—facilitating transactions without barter's
hassles. The most important function of money is that of a medium of exchange. Money is social
contrivance. For example, a farmer can sell leather for money, then use that to buy shoes, without
needing a direct match. In Bangladesh, taka notes make daily trades seamless, from street vendors
to markets. Without this, economies would grind to a halt. As one source notes, this function
reduces transaction costs dramatically.
2. Unit of Value (or Unit of Account): Money provides a common measure for pricing goods and
services. In a barter system, valuing a cow at two pigs is messy, especially if fractions are needed.
Many source highlights how money solves this: "Choosing a common unit of value - money serves
much time and energy in keeping track of the relative prices." Today, everything from a cup of tea
(20 taka) to a house (millions) is priced in the same unit, making comparisons easy. This function
is crucial for accounting and budgeting, imagine planning without a standard measure!
3. Standard of Deferred Payment: Money allows contracts over time, like loans or mortgages.
We know "That which serves as money will also be that in which payments deferred into the future
will be made." For instance, a car loan is repaid in monthly installments in the same currency. This
enables long-term planning, but inflation can erode value, making it less reliable. In modern
contexts, this function supports credit systems, fueling economic growth.
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4. Store of Value: People save money for future use because it holds value over time. "Since
money is the medium of exchange, it can also be used as a means of storing wealth." Unlike
perishable goods, money (especially in savings accounts) can accumulate. However, inflation
diminishes this think of how 100 taka buys less today than a decade ago. Alternatives like stocks
or gold often serve better for long-term storage. In volatile economies, cryptocurrencies are gaining
traction as digital stores of value.
These functions are interconnected; a good medium of exchange must also be a reliable store of
value. They enable specialization in an economy tailors make pants, cobblers’ shoes, all connected
via money
Fig 2: function of money
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3. Part 2: Briefly Discuss the Demand for Money
Understanding Demand for Money: Beyond Just Spending:
Why do people hold money instead of investing it all? The demand for money refers to the desire
to keep cash or liquid assets rather than illiquid ones like property. This can be explained through
Keynesian theory, contrasting it with classical views that ignored interest rates and asset choices.
Classically, demand was seen as tied only to transactions, but Keynes argued it's more nuanced,
depending on income, interest rates, and uncertainty.
It states, "If income is given, a man has to decide how much he is to consume and how much he is
to save. Then out of the saved amount how much should he hold or lend out depends on what
Keynes calls Liquidity Preference." Liquidity preference is the demand for money as a liquid asset,
inversely related to interest rates the higher the rate, the less people hold cash, preferring bonds or
savings.
Keynes identified three motives for demanding money: transactions, precautionary, and
speculative. This theory revolutionized economics by linking money demand to broader behaviors.
Keynesian Motives for Money Demand:
Fig 3: Keynesian Motives for Money Demand
1. Transactions Motive: People hold money for everyday expenses. This can be divided
into income motive (bridging gaps between paychecks and spending) and business motive
(covering sales and outlays). It depends on income levels and payment intervals if you're
paid monthly, you need more cash on hand. For firms, it's about output value and supply
chains. In Bangladesh, with many informal workers paid daily, this motive is strong for
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small amounts. Globally, higher incomes mean higher transactions demand. Think of it as
the "wallet money" for groceries or bills.
2. Precautionary Motive: This is about holding extra cash for emergencies, like medical
bills or job loss. "People motivated by the precautionary motive hold money in order to
protect themselves against unforeseen emergencies. The strength of this motive largely
depends on the level of income." In uncertain times, like during natural disasters in
Bangladesh (floods), people hoard cash. This motive rises with economic volatility; post-
2008 financial crisis, global savings rates spiked as a precaution. It's like an insurance
policy in liquid form.
3. Speculative Motive: Here, money is held to capitalize on investment opportunities,
especially when interest rates are low or asset prices are expected to fall. "People are
motivated by the speculative motive hold money in order to take advantage of profitable
speculative opportunities." If bond prices are high (low yields), people hold cash waiting
for better deals. This is sensitive to interest rates high rates encourage lending, low rates
boost holding cash. In modern markets, this extends to stocks or crypto; during bull
markets, speculative demand might drop as people invest.
Keynes argued total demand is the sum of these motives, making it responsive to interest rates,
unlike classical theories focused solely on income. Factors influencing demand include income
(positive correlation), interest rates (negative), and inflation (high inflation reduces holding as
value erodes).
Modern Implications and Critiques:
While Keynes' theory is foundational, modern economists add layers. For example, in digital
economies, demand shifts with fintech apps reduce transactions demand by enabling instant
transfers. Cryptocurrencies introduce new speculative motives, volatile but attractive. Critiques
note Keynes overlooked wealth effects or technology, but it remains key for monetary policy, like
central banks adjusting rates to influence demand.
In Bangladesh, with high bank money usage (90%), demand is tied to formal banking growth.
During inflation, precautionary demand rises, affecting savings.
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4. Central Bank Vs Commercial Bank
Bank:
Banks play a crucial role in the economy by managing money, credit, and financial transactions. However,
not all banks are the same. The two main types of banks are Central Banks and Commercial Banks, each
serving different purposes.
Central Bank:
A central bank is the supreme financial institution that manages a country's monetary policy, currency
supply, and interest rates. It acts as the banker to the government and other banks. Example. Bangladesh
Bank
Functions of a Central Bank:
➢ Issues currency.
➢ Controls inflation and deflation.
➢ Acts as a lender of last resort.
➢ Manages foreign exchange reserves.
➢ Supervises commercial banks.
Commercial Bank:
A commercial bank is a financial institution that provides banking services to the general public and
businesses. Its main functions include accepting deposits, granting loans, and facilitating transactions.
Examples. Sonali Bank, City Bank.
Functions of a Commercial Bank:
• Accepts deposits (savings, current, fixed)
• Provides loans and credit facilities
• Facilitates payments (cheques, cards, online transfers)
• Offers investment services
• Provides foreign exchange services
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Central Bank Vs Commercial Bank
Criteria Central Bank Commercial Bank
The main monetary authority of a country that A financial institution that accepts
Definition regulates currency, credit, and the banking deposits from the public and provides
system. loans.
Usually owned and controlled by the
Ownership Can be privately or publicly owned.
government.
Main Maintain monetary stability and control
Earn profit through banking operations.
Objective inflation.
Issues currency, regulates credit, controls Accepts deposits, grants loans, offers
Functions
monetary policy, supervises banks. financial services to customers.
General public, businesses, and
Clients Government and other banks.
organizations.
Currency Cannot issue currency; uses currency
Sole authority to issue the nation’s currency.
Issuance provided by the central bank.
Not profit-oriented; focused on economic Profit-oriented through interest and
Profit Motive
stability. service charges.
Controls and monitors the operations of Operates under the rules and regulations
Control
commercial banks. set by the central bank.
Examples Bangladesh Bank Sonali Bank, BRAC Bank
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5. Conclusion:
Money, evolving from barter to digital forms, is the backbone of trade and economic planning. Its
functions medium of exchange, unit of value, standard of deferred payment, and store of value
enable specialization and growth. The demand for money, driven by transactions, precautionary,
and speculative motives, reflects complex economic behaviors shaped by income and interest
rates. Blending documented insights with global trends, from Bangladesh’s taka to Bitcoin, shows
money’s dynamic role. Understanding these concepts illuminates personal finance and global
economic strategies in an ever4 changing financial landscape.
6. References:
[1] Investopedia. (n.d.). Understanding money.//www.investopedia.com
[2] Investopedia. (n.d.). History of money.//www.investopedia.com
[3] Forex.com. (n.d.). Types of money. https://www.forex.com
[4] Khan Academy. (n.d.). Functions of money. https://www.khanacademy.org
[5] Principles of Economics. (n.d.). Defining money.
[6] Aim Institute. (n.d.). Keynesian demand for money.
[7] Wikipedia contributors. (n.d.). Liquidity preference. In Wikipedia, The Free Encyclopedia.
Retrieved from https://en.wikipedia.org/wiki/Liquidity_preference
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