June 14, 2024 

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KEYNESIAN MODEL: A macroeconomic model based on the principles of Keynesian economics that is used to identify the equilibrium level of, and analyze disruptions to, aggregate production and income. This model identifies equilibrium aggregate production and income as the intersection of the aggregate expenditures line and the 45-degree line. The Keynesian model comes in three basic variations designated by the number of macroeconomic sectors included--two-sector, three-sector, and four sector. The Keynesian model is also commonly presented in the form of injections and leakages in addition to the standard aggregate expenditures format. This model is used to analyze several important topics and issues, including multipliers, business cycles, fiscal policy, and monetary policy.

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The four primary characteristics of money are: (1) durability, (2) divisibility, (3) transportability, and (4) noncounterfeitability. Although a number of items or assets have served as money, those that best match these four characteristics are the ones that best function as money, the ones that best operate as a medium of exchange.
Almost any item, any asset, any "thing" can function as money so long as it is generally accepted as payment. In fact, a lot of different "things" have been used as money over the centuries--gold, silver, copper, nickel, animal skins, chocolate bars, cigarettes, precious gems, semi-precious gems, really precious gems, and assorted food products.

While a number of "things" have been used as money, some have worked better than others. Those "things" that did not work so well were replaced by other "things" that worked better. Those "things" that worked best tended to have four basic characteristics: (1) durability, (2) divisibility, (3) transportability, and (4) noncounterfeitability.


This first characteristic means that an item retains the same shape, form, and substance over an extended period of time; that it does not easily decompose, deteriorate, degrade, or otherwise change form. However, durability also extends beyond the physical realm to include social and institutional durability.

Durability is critical for money to perform the related functions of medium of exchange and store of value. People are willing to accept an item in payment for one good because they are confident that the item can be traded at a later time for some other good. An item works as a medium of exchange precisely because it stores value from one transaction to the next. And this requires durability.

Refined metals, such as gold, silver, copper, or nickel, have historically taken center stage as money because they are extremely durable materials. An ounce of gold today will be an ounce of gold tomorrow, next week, and a thousand years hence. Organic products, such as lettuce, ice cream, or raw meat, are seldom if ever used as money because they are extremely perishable. A crisp leaf of lettuce might not be recognizable as lettuce next week let alone a thousand years hence.

While physical durability has been historically important for money, social and institutional durability is also important for modern economies. The durability of modern money, especially paper currency and bank account balances, depends on the durability of social institutions--especially banks and governments. While government-issued paper currency might remain physically intact for centuries, its ability to function as money depends on the institutional durability of the government.


This second characteristic means money can be divided into small increments that can be used in exchange for goods of varying values. For an item to function as THE medium of exchange, which can be used to purchase a wide range of different goods with a wide range of different values, then it must be divisible. The smaller the divisions, the better. For an item to function as THE medium of exchange it must have increments that allow it to be traded for both battleships and bubble gum, and everything in between.

Divisibility is one reason why metals, such as gold, silver, copper, and nickel, have been widely used as money throughout history. As pure elements, each can be divided into really, really small units, in principle, down to the molecular level. In contrast, livestock, which has seen limited use as money in less sophisticated agrarian societies, never become widely used as money in modern economies. Dividing live water buffalo into increments small enough to buy bubble gum is highly impractical.

For example, U.S. money, both paper currency and bank account balances, comes in increments of one penny, sufficiently divisible to accurately match the value of virtually every good and service available in the economy. If U.S. money consisted exclusively of $100 gold coins, and nothing smaller, people would have problems buying goods such as soft drinks, gasoline, or bubble gum. These goods, and millions more, have values that cannot be rounded to the nearest $100.


This third characteristic means that money can be easily moved from one location to another when such movement is needed to complete exchanges. When people head off to the market to make a purchase or two, then they need to bring along their money. But to "bring along their money" they obviously need to "BRING along their money." That is, the money must be transportable. Money that is NOT transportable is not transported, so it is not used.

Once again, transportability has played a key role in the use of metals like gold, silver, copper, and nickel as money. Carrying around a satchel of metal coins was never much of a burden. However, these metals were largely replaced by paper currencies in the 20th century because paper was lighter and easier to carry. In fact, a $100 bill is just as easy to carry as a $1 bill. This notion has been taken a step farther with paper checks used to access checking account balances. A check for $1 million is just as easy to transport as a check for $1.

Items such as granite blocks, radioactive plutonium, and maple syrup come up short on the transportability scale. Items that are physically heavy relative to their value in exchange, or need special handling, are not easily transportable. Heading off to the market with a vat of syrup or a lead canister of plutonium just does not work. And who wants to lug blocks of granite around the shopping mall?


This fourth characteristic means that money cannot be easily duplicated. A given item cannot function as a medium of exchange if everyone is able to "print up," "whip up," or "make up" a batch of money any time that they want. Why would anyone accept money in exchange for a good, if they can make their own? Money that is easily duplicated ceases to be THE medium of exchange.

Preventing the unrestricted duplication of money is a task that has long been relegated to government. In fact, this task is one of the prime reasons why governments exist. An economy needs government, ABSOLUTELY NEEDS government, to regulate the total quantity of money in circulation. By controlling money duplication, governments are also able to control the total quantity in circulation, and this control is what gives money value in exchange.

While governments try to keep pace with counterfeiters, they are usually a step or two behind. Through the years governments have tried to thwart counterfeiters by stamping images on coins, using special ink and paper for currency, and generally maintaining high levels of security surrounding money "production." To counter advances in computer technology in the 1990s, the United States redesigned paper currency, adding water marks, microscopic printing, and magnetic strips, in an ongoing effort to make the task of counterfeiting currency just a little more difficult.


Recommended Citation:

MONEY CHARACTERISTICS, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2024. [Accessed: June 14, 2024].

Check Out These Related Terms...

     | money | money functions | M1 | barter | commodity money | fiat money | value in use | value in exchange | medium of exchange |

Or For A Little Background...

     | macroeconomics | exchange | market | economy | government functions | inflation | unemployment | business cycles |

And For Further Study...

     | fractional-reserve banking | banking | money creation | monetary policy | Federal Reserve System | money supply | money supply, aggregate demand determinant | Keynesian economics | aggregate market analysis | near money | plastic money |

Related Websites (Will Open in New Window)...

     | Federal Reserve System | Federal Reserve Education | U.S. Department of the Treasury |

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