Functions of Money

It is the set of financial assets in an economy that is generally accepted in exchange for other goods, is used as a reference in valuing other goods, and can be stored as wealth.

1)medium of exchange(facilitates the exchange)Example:buying and selling2)unit of account(yardstick for measuring the values and prices)Example:dollars and cents3)store of value(not need to spend it immediately upon receiving it and it transfer purchasing power from the present to the future.)Example:checking account

The more easily and cheaply an asset can be converted into spending power, the more liquid it is.

M1, M2 and M3.

1)currency in circulation--->coins and paper money held by public2)demand /checkable deposits--->Current accounts

Means its intrinsic value is less than actual value.

M1 + Narrow quasi-money

1.Noncheckable saving accounts (Savings deposits).
2.Money market deposit accounts (NCDs).
3.Money market mutual fund balances, (Repos, and foreign currency deposits).
4.Small time deposits (fixed deposits).

Broadest measure for money and it includes some of the “longer-term” money market instruments.(very non-liquid assets)Example:assets of mostly large businesses and institutions

(1) The Central Bank
(2) The banking system (i.e. depository institutions)
(3) Depositors
(4) Borrowers

An institution that oversees the banking system and regulates the money supply. Example:the Central Bank in U.S. is the Federal Reserve (Fed)

1.Regulates banks to ensure they follow federal laws intended to promote safe and sound banking practices.
2.Acts as a banker’s bank, making loans to banks and as a lender of last resort.
3.Conducts monetary policy by controlling the money supply.

The quantity of money available in the economy.

It is setting of the money supply by policymakers in the central bank

They use one of its three major tools:1)open market operation2)serve requirement3)discount window lending