ABSTRACT
In national economies as well as in the world economy money plays an important role, as a unit of calculation, as a medium of exchange and as a store of value. Money reduces the costs of transaction. Its invention, i.e. the transition from an exchange economy to a money economy, must be interpreted as an important innovation to lower the costs of transaction. In the following, we start with a thought experiment assuming that there is a world money market with only one currency (section 5.l). As a result some simple conditions can be derived for an equilibrium on the global money market. But in reality this standardized money does not exist and thus the prices of currencies, the exchange rates, play an important role. The exchange rate can follow purchasing power parity (section 5.2), but it may also be determined by interest rate parity (section 5.3) and it may overshoot, at least in the short run (section 5.4). Expectations play a major role (section 5.5). Some empirical evidence on purchasing power parity is presented (section 5.6). Finally, the three major currencies of the world are discussed (section 5.7).
