Economics

Money

Money is defined as anything that makes exchanges of goods and services easier. There is three basic functions of money; medium of exchange, unit of account, and store of value. Also, there are four charateriscs of money; durable, portable, standardized, and divisible. Lastly, money supply is made up of M1, M2, and M3. A medium of money is used in the economy to lower the search costs of matching trades and trading easier to do. A store value allows people to use paper money instantly and use it for purchasing goods and services. In order for a good to be a medium of exchange, it has to be durable and portable. In addition it also needs to be standardized and be able to be divisible before it can be circulated in the economy.

For example, the Government uses money to pay taxes and uses money as legal tender. Secondly, if there is enough money in the economy businesses runs as usual. However, if there is not enough money in the economy then it’s in trouble and the economy will go into a recession.

The three components of money are a major key for our economy and Federal Reserve and Monetary Policy. M1 is the narrowest and basic forms of money. It contains cash, coins, checks, and travelers’ checks. M2 is in the middle, which contains savings accounts, certificates of deposit (small), and money market mutual funds. Lastly, M3 is the broadest forms, which contains CDs over $100,000 amount, repurchase agreements, and Eurodollar deposits.

Central Bank Manages Monetary System

The Federal Reserve oversees the nation’s banking system and also controls inflation through the monetary policy set by actions of the Federal Open Market Committee (FOMC). It also provides services including check clearing, Fed wiring, and making emergency loans. The Goal of the Federal Reserve is to promote maximum employment, stable prices, and moderate long-term interest rates. Stable prices are preconditioned in the long run for a maximum stable output growth and employment...