(a) Two characteristics of money that enable it to function well in the modern economy are:

1. Durability: Money must withstand physical wear and tear to retain value over time. For example, Ghanaian Cedi notes are made from durable polymer materials to prevent quick degradation.
2. Divisibility: Money should be easily divisible into smaller units without losing value, allowing for precise transactions. In Ghana, the Cedi is divisible into pesewas, facilitating small purchases like buying sachet water.

(b) The four functions of money in a modern economy, which make it preferable to the barter system (where direct exchange lacks efficiency due to double coincidence of wants), are:

1. Medium of Exchange: Money facilitates transactions by eliminating the need for barter. For instance, in Ghana, workers receive salaries in Cedis to buy goods, avoiding the inefficiency of trading services directly.
2. Unit of Account: Money provides a standard measure for valuing goods and services. Banks in Ghana use the Cedi to price loans and deposits, enabling clear financial statements under BoG regulations.
3. Store of Value: Money holds purchasing power over time, better than perishable barter goods. Savings accounts in Ghanaian banks allow individuals to store wealth, though inflation can erode this, as seen post-2022 DDEP.
4. Standard of Deferred Payment: Money enables credit and debt settlements over time. Loans from Ecobank Ghana are repaid in Cedis, with interest, supporting long-term contracts unlike barter’s immediacy.

(c) The Central Bank, such as the Bank of Ghana (BoG), uses the reserve ratio to reduce inflation by increasing it, which contracts the money supply. A higher reserve ratio (e.g., from 5% to 10%) means banks must hold more deposits as reserves and lend less, reducing credit creation via the money multiplier (e.g., multiplier drops from 20 to 10). This decreases aggregate demand, curbing inflationary pressures from excess money chasing goods, as implemented in BoG’s monetary policy tools under the inflation-targeting framework to maintain price stability.

(d) Money supply refers to the total amount of monetary assets available in an economy at a specific time, including currency in circulation and demand deposits. In Ghana, BoG measures it through aggregates like M1 (narrow money: cash + checking deposits) and M2 (broad money: M1 + savings/time deposits), influencing economic activity and inflation.

(e) Nominal interest rates are the stated rates without adjusting for inflation, while real interest rates account for inflation to reflect true purchasing power.

For example, if a Ghanaian bank offers a nominal rate of 20% on a loan and inflation is 15%, the real rate is 5% (nominal – inflation), meaning the lender’s real return is only 5% after price increases. In contrast, during low inflation (e.g., 10%), a 20% nominal rate yields a 10% real rate, benefiting lenders more, as per Fisher equation: Real Rate ≈ Nominal Rate – Inflation Rate. This distinction affects borrowing decisions, with high inflation post-2023 DDEP leading to negative real rates in Ghana, discouraging savings.