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Functioning Money

By chocolate1 May 25, 2011 1669 Words
* Function of money
* Store of wealth (value) is any form of commodity, asset, or money that has value and can be stored and retrieved over time. Real estate, precious metals, gem stones, and similar assets can be a store of value. In all of these cases, people can exchange these items and hold them for varying periods of time. The value may even rise in storage, and sometimes a store of value can be held strategically with the goal of enjoying a rise in value, as for example with people who hold deposits of gold. The concept of a store of value is an important aspect of many economies. It allows people to engage in a variety of activities because they can rely upon the exchange of items which will be useful not just immediately, but also into the future. For example, people work in exchange for money which acts as a store of value, as opposed to in exchange for things like food, which must be used immediately or it will lose its value. Long term economic activities rely upon the exchange of items which have both immediate and long term value. This allows economies to expand and develop over time as well as to advance. Storing and retrieving items of value lies at the base of many complex activities, such as trading on the stock market, in which people exchange money and stocks in the confidence that both can be retained and later retrieved for sale or transfer. * Unit of account is a standardized unit which can be used to describe the value of something. Currencies are commonly used as a unit of account because they have a number of traits which make them suitable for this purpose, but objects can also be used, as for example pieces of gold or silver. Historically, people often used tradable goods like sacks of flour or livestock as units of account. * Medium of exchange is something used as a convenience to facilitate simple and uncomplicated trade. With a medium of exchange, such as money, trade is much easier as does not require a precise link between the desires of both parties. One can sell commodities for money and buy other commodities with that money, eliminating the need for a direct exchange of commodities. * Measures of money imply that a certain amount of money exists at any given time, even though the quantity may be unknown.  In truth there can be no meaningful measure of the quantity because it is continually varying as a function of demand. The Federal Reserve has its own arbitrary measures of the money supply which it once used to help guide its monetary policy decisions.  It defines money as the total of cash in circulation and deposit liabilities of banks and thrifts.  * M1 is the narrowest definition of the money supply. M1 consists of the most highly liquid assets. M1 includes all forms of assets that are easily exchangeable as payment for goods and services: currency in circulation, checking account deposits in banks, and holdings of traveler’s checks. * The first item in M1 is currency and coin in circulation. In the US, currency refers to $1, $5, $10, $20, $50 and $1000 bills. Coin refers to pennies, nickels, dimes, etc. In circulation, means that it has to be outside of banks, in people's and businesses wallets and purses and cash registers. Once the currency or coin is deposited in a bank, it is no longer considered to be in circulation, thus it is no longer a part of the M1 money supply. * The second item in M1 is demand deposits or checking account balances in banks. These consist of money individuals and businesses have deposited into an account in which a check can be written to pay for goods and services. When a check is presented to the bank, it represents a demand for transfer of funds from the check writer to the agent receiving the check. Since the funds must be disbursed upon demand, we also refer to these as demand deposit. * The third item of M1 is traveler's checks. Traveler's checks are like currency, except that they have a form of insurance tied to them. If a traveler's check is lost or stolen, the issuer will reimburse you for the loss. * M2 is a broader definition of the money supply. It includes M1 plus savings account balances, small denomination time deposits, time deposits of under $100,000, balances in money market deposit accounts in banks, and noninstitutional money market fund shares that are slightly less liquid. * M3 is an even broader definition of the money supply, including M2 and other assets even less liquid than M2. M3 included all of  M2 (which includes M1) plus large-denomination ($100,000 or more) time deposits, balances in institutional money funds, repurchase liabilities issued by depository institutions, and Eurodollars held by U.S. residents at foreign branches of U.S. banks and at all banks in the United Kingdom and Canada. * Money versus credit

Many people buy goods and services with credit cards, yet credit cards are not included in definitions of the money supply. The reason is that when you buy something with a credit card, you are in effect taking out a loan from the bank that issued the credit card. Only when you pay your credit card bill at the end of the month is the transaction complete.

* Interest rate The cost of borrowing funds, usually expressed as a percentage of the amount borrowed.
* Supply and Demand for Money- The supply of money is what gives each dollar its value. Everything is equal, which means the great the supply, the lesser the value. * Bond prices and interest rate- Similar to an I.O.U. Interest rates are the money added to what is borrowed.

* Banking
* Functional reserve banking system- the banking practice in which only a fraction of a bank's demand deposits are kept as reserves (cash and other highly liquid assets) available for withdrawal. * Creation of Money (Money multiplier effect) - The expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends on the percentage of deposits that banks are required to hold as reserves. In other words, it is money used to create more money and is calculated by dividing total bank deposits by the reserve requirement. * Regulation of banks - a form of government regulation which subject banks to certain requirements, restrictions and guidelines. *******Minimum requirements- Requirements are imposed on banks in order to promote the objectives of the regulator. The most important minimum requirement in banking regulation is maintaining minimum capital ratios.*********** * Financial Panics- events during which bank depositors attempt to withdraw their deposits, equity holders sell stock, and market participants in general seek to liquefy their assets.

* Federal Deposit Insurance Corporation (FDIC) - an independent agency of the US federal government created to preserve and promote public confidence in the US banking system. The FDIC was created by Congress in 1933 as part of the Glass-Steagall Act. The primary activity of the FDIC is to ensure deposits against loss due to bank insolvency. The FDIC insures certain types of account including checking accounts, savings accounts, and certificates of deposit, up to a total of $100,000 per depositor, and accounts held jointly as well as retirement accounts, can also separately be insured up to $100,000 by the FDIC. * U.S. Federal Reserve – The Federal Reserve is the central bank of the United States. The Federal Reserve implements U.S. monetary policy. * Federal Reserve Act of 1913 - An Act To provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes. * Regional Federal Reserve District Bank – This is what is used to identify the Federal Reserve bank in that specific region.

* Governing Body – The persons who make up a body for the purpose of administering something. * Board of Directors - A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. * Federal Open Market Committee - The branch of the Federal Reserve Board that determines the direction of monetary policy. The FOMC is composed of the board of governors, which has seven members, and five reserve bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other reserve banks rotate their service of one-year terms. * Board of Directors of the Regional Federal Reserve Banks – A group comprised of the directors of the twelve Federal Reserve Banks in the United States. * Policy Tools - These are practical resources that help you access and make the best use of evidence in the development and evaluation of policy. * Reserve Requirements - The Reserve Requirements (or Cash Reserve Ratio) is a Central bank regulation that sets the minimum reserves each Commercial bank must hold to customer deposits and notes. * Discount Rate - The interest rate that an eligible depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank. * Open Market Operation/ Federal Funds Rate - The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate. * Lags in Monetary Policy - It is the delay in implementation of a monetary policy.

* Liquidity Trap - A situation in which prevailing interest rates are low and savings rates are high, making monetary policy ineffective. In a liquidity trap, consumers choose to avoid bonds and keep their funds in savings because of the prevailing belief that interest rates will soon rise. Because bonds have an inverse relationship to interest rates, many consumers do not want to hold an asset with a price that is expected to decline.

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