Question

Which approach among the following four important approaches to define money, identifies the money with the credit extended by a wide variety of sources?

• A. Gurley and Shaw Approach
• B. Central Bank Approach
• C. Chicago Approach
• D. Conventional Approach

Hint:

Gurley and Shaw expand the money definition beyond cash to include credit from financial intermediaries—think banks, not just banknotes!

Answer 1

The Correct Option is A

The Gurley and Shaw Approach, developed by economists John G. Gurley and Edward S. Shaw, redefines money by emphasizing the role of financial intermediaries (e.g., banks, credit unions, and other institutions) in creating credit that functions as money. Unlike the Conventional Approach, which limits money to currency and demand deposits, or the Central Bank Approach, which focuses on monetary base (currency and reserves), Gurley and Shaw include a broader spectrum of financial assets, such as savings deposits and other near-money instruments, that serve as a medium of exchange or store of value. The Chicago Approach, associated with Milton Friedman, focuses on a broader but still limited definition of money (M1, M2). Thus, the Gurley and Shaw Approach uniquely emphasizes credit extended by various sources, making option (1) correct.

Answer 2

Elimination by definition:
The question asks for the approach that treats money as credit extended by many different sources. Testing each option against this definition: the Central Bank Approach restricts money to currency and bank reserves controlled by the monetary authority, not general credit; the Chicago Approach (linked to Milton Friedman) defines money mainly through M1/M2 aggregates issued by banks; the Conventional Approach limits money strictly to currency and demand deposits.
None of these three treat credit from a wide variety of sources as the defining feature of money. Only the Gurley and Shaw Approach explicitly widens the definition of money to include liabilities created by all financial intermediaries, not just banks, matching the question exactly.
Therefore, option (1) is correct.