Functioning Money

Topics: Federal Reserve System, Central bank, Monetary policy Pages: 5 (1669 words) Published: May 25, 2011
* 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...
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