Homework Question on Money and its effects To Economy
You use money just about every day.
- What is money and what functions does it perform?
- How is the supply of money measured?
- Who influences how much liquidity in created or reduced in the U.S. economy?
Homework Answer on Money and its effects To Economy
Money is a tool which has been universally accepted as a mode of payment for goods and services and a means of settling one’s accruing debts (Schwartz 2008). The major roles of money in the market are as follows;
- As a medium of exchange money boosts trade between the sellers and buyers in an economy.
- Money also stores value over a long period of time such that one can use it in the future.
- Money helps in apportioning value to both goods and services.
How is the supply of money measured?
Money supply refers to all monies, in varied forms, which are circulating in the economy at any one time (Schwartz 2008). According to Elliot, money supply is measurable as a sum of;
M1+M2+M3
Where M1 refers to the most liquid money such as cash and cheques.
M2 equals M1+ savings for individuals and small money market investments
M3 is M2 plus all large deposits and forms of investments which are less liquid (2015).
Responsibility over liquidity in the U.S. economy
The Federal Reserve of the United States is responsible for ensuring that liquidity is well managed through set monetary policies with an aim of having levels money supply neither too high nor too low. The common measure which they use is the deposit reserves that banks keep with them. It is mandatory for banks to keep a specific percentage of their deposits with the Federal Reserve (Elliot 2015). Whenever there is need to increase money supply, this percentage is reduced so that banks have more money to lend out to customers and the interest rates are low to encourage borrowing.