Money and Banking System

Money and Banking System

Money is any item with widespread acceptance as a medium of exchange and measure of value within an economic system. Money has four main functions. The first function is as a medium of exchange. Money enables people to exchange goods and services easily because of its general acceptability. The second function of money is as a measure of value. One can measure the value of goods and services in terms of money. This value is the price. The other function of money is as a store of value as money can hold value over a long period. People can keep the money until they decide how to spend it (Arnold, 2008). The last function of money is as a standard of deferred payments. Money allows people to make payments in the future for costs incurred currently.

According to Bade and Parkin (2015), the Federal Reserve measures the supply of money in the economy by evaluating the degree of asset liquidity and the size of M1, M2 and M3 types of money. The M1 money comprises of liquid money such as the currency in circulation and the amounts held in checking accounts. This money mainly serves as the medium of exchange. The M2 money comprises of amounts in savings accounts, mutual funds and other deposits that a person can access easily. This money mainly serves as a store of value. The M3 money comprises of large deposits and other financial instruments used by large businesses. The Federal Reserve creates or reduces liquidity in the U.S economy through various monetary policies and programs (Croushore, 2006). For example, the Federal Reserve implemented the quantitative easing program from late 2008 to help boost investors’ confidence and thus increase liquidity in the affected markets.

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