MONEY MARKETMoney is any object or record that is generally accepted as payment for goods and services andrepayment of debts in a given country or socio-economic context. The main functions of moneyare distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionallyin the past, a standard of deferred payment. Any kind of object or secure verifiable record thatfulfills these functions can serve as money.Money originated as commodity money, but nearly all contemporary money systems are basedon fiat money. Fiat money is without intrinsic use value as a physical commodity, and derivesits value by being declared by a government to be legal tender; that is, it must be accepted as aform of payment within the boundaries of the country, for "all debts, public and private".The money supply of a country consists of currency (banknotes and coins) and bank money (thebalance held in checking accounts and savings accounts). Bank money usually forms by far thelargest part of the money supply.
Contents 1 History o 1.1 Etymology 2 Functions o 2.1 Medium of exchange o 2.2 Unit of account o 2.3 Store of value o 2.4 Standard of deferred payment 3 Money supply o 3.1 Market liquidity 4 Types of money o 4.1 Commodity money o 4.2 Representative money o 4.3 Fiat money o 4.4 Currency o 4.5 Commercial bank money 5 Monetary policy 6 See also 7 References
History A 640 BC one-third stater electrum coin from Lydia. Main article: History of moneyThe use of barter-like methods may date back to at least 100,000 years ago, though there is noevidence of a society or economy that relied primarily on barter. Instead, non-monetarysocieties operated largely along the principles of gift economics. When barter did occur, it wasusually between either complete strangers or potential enemies.Many cultures around the world eventually developed the use of commodity money. The shekelwas originally a unit of weight, and referred to a specific weight of barley, which was used ascurrency. The first usage of the term came from Mesopotamia circa 3000 BC. Societies in theAmericas, Asia, Africa and Australia used shell money – often, the shells of the money cowry(Cypraea moneta L. or C. annulus L.). According to Herodotus, the Lydians were the first peopleto introduce the use of gold and silver coins. It is thought by modern scholars that these firststamped coins were minted around 650–600 BC.Song Dynasty Jiaozi, the worlds earliest paper moneyThe system of commodity money eventually evolved into a system of representativemoney. This occurred because gold and silver merchants or banks would issuereceipts to their depositors – redeemable for the commodity money deposited. Eventually, thesereceipts became generally accepted as a means of payment and were used as money. Papermoney or banknotes were first used in China during the Song Dynasty. These banknotes, known
as "jiaozi", evolved from promissory notes that had been used since the 7th century. However,they did not displace commodity money, and were used alongside coins. Banknotes were firstissued in Europe by Stockholms Banco in 1661, and were again also used alongside coins. Thegold standard, a monetary system where the medium of exchange are paper notes that areconvertible into pre-set, fixed quantities of gold, replaced the use of gold coins as currency in the17th-19th centuries in Europe. These gold standard notes were made legal tender, andredemption into gold coins was discouraged. By the beginning of the 20th century almost allcountries had adopted the gold standard, backing their legal tender notes with fixed amounts ofgold.After World War II, at the Bretton Woods Conference, most countries adopted fiat currenciesthat were fixed to the US dollar. The US dollar was in turn fixed to gold. In 1971 the USgovernment suspended the convertibility of the US dollar to gold. After this many countries de-pegged their currencies from the US dollar, and most of the worlds currencies became unbackedby anything except the governments fiat of legal tender and the ability to convert the money intogoods via payment.EtymologyThe word "money" is believed to originate from a temple of Hera, located on Capitoline, one ofRomes seven hills. In the ancient world Hera was often associated with money. The temple ofJuno Moneta at Rome was the place where the mint of Ancient Rome was located. The name"Juno" may derive from the Etruscan goddess Uni (which means "the one", "unique", "unit","union", "united") and "Moneta" either from the Latin word "monere" (remind, warn, or instruct)or the Greek word "moneres" (alone, unique).In the Western world, a prevalent term for coin-money has been specie, stemming from Latin inspecie, meaning in kind.
MONEY MARKET INTRODUCTIONMoney market means market where money or its equivalent can be traded. Money issynonym of liquidity. Money market consists of financial institutions and dealers inmoney or credit who wish to generate liquidity. It is better known as a place where largeinstitutions and government manage their short term cash needs. For generation ofliquidity, short term borrowing and lending is done by these financial institutions anddealers. Money Market is part of financial market where instruments with high liquidityand very short term maturities are traded. Due to highly liquid nature of securities andtheir short term maturities, money market is treated as a safe place. Hence, moneymarket is a market where short term obligations such as treasury bills, commercialpapers and bankers acceptances are bought and sold.PURPOSEMoney Market transactions are used for the short- to medium-term investment orborrowing of liquid funds.FEATURESThe product types in the Money Market area are:_ Fixed-Term Deposit_ Deposit at Notice_ Commercial PaperThe functions offered support the trading activities involved in preparing and enteringtransactions in addition to the back office activities such as monitoring, accounting,payment control and transaction analysis. Many steps in this process chain areautomated by the SAP R/3.System and the status of a transaction can be evaluated and monitored at any time. Toaccess the Money Market module, proceed as follows:
Choose Accounting _ Treasury _ Treasury Management _ Money Market. The followingsections give you an overview of the Money market functions. The collective processingfunction simplifies the transaction management process by displaying a list of all thetransactions with common selection criteria. From here, you simply click a button tobranch to the various processing options. To speed up processing, there is a Fast entryfunction in the Money Market and Foreign Exchange areas for the most commontransactions. The Money Market area also has a Fast processing function.The trading area also includes some Utilities:- Date check (to determine whether the requested due date falls on a workday).- Option price calculator, which you use to compare the option prices requested with ourown calculations based on market data (only in the Foreign Exchange and Derivativesareas). - Securities account cash flow in the Securities area, which displays all the flowsfor a security in a particular securities account. The specific characteristics of certainproducts call for other activities, which you can carry out in the trading area. These areorder execution and order expiration as well as knock-in/knock-out activities for OTCtransactions. In the Securities area, you can exercise different rights (conversion rights,subscription rights, exercise warrants, and detach warrants).IMPORTANCE SOURCE OF CAPITALMoney market is an important source of financing for trade and industry. Theshort-term finances are made available through bills, commercial papers, etc.The happenings in the money market influence the availability of financesboth for the national and international trade. Besides trade and industry,money market offers to the government an important non-inflationary avenueof raising short-term funds through bills that are subscribed by commercialbanks and the public.
IDEAL INVESTMENTMoney market offers an ideal source of investment for the commercial banks. Themarket helps them invest their short-term surplus funds so as to meet statutory reserverequirements. For instance, the requirements of Cash Reserve Ratio (CRR) andStatutory Liquidity Ratio (SLR) vary every fortnight depending on banks’ Net Demandand Time Liability (NDTL). EFFECTIVE MONETARY MANAGEMENTAn efficient money market being sensitive in nature allows for the effectiveimplementation of monetary policy of the central bank and thus paves way for theefficient monetary management of the country. In fact, the money market events serveas an important guide to the government in formulation, revising and implementing itsmonetary policy. This is rightly so, given the fact that the conditions prevailing in moneymarket serve as an indicator of monetary state of an economy. The monetary authorityuses the money market for diffusing the effects of its actions throughout the bankingsystem and the economy, so as to promote economic growth with stability. ECONOMIC DEVELOPMENTMoney market being an integral part of a country’s economy, contributes substantially tothe economic development of a country. A developed money market is indispensablefor the rapid development of the economy. In fact, the stage of development of theeconomy will be reflected in the stage of development of a money market. This is borneout by the fact that ill developed nature of a money market is responsible for theprimitive nature of economic development of a country. The absence of a well-developed money market would constrain the economies from making available, on acontinuous basis the supply of adequate funds.
EFFICIENT BANKING SYSTEMThe existence of a developed money market greatly facilitates the smooth and efficientfunctioning of the banking and financial system. Such an advantage contributes to thepromotion of trade and industry in the economy. Further the mediating role played bythe commercial bankers ensures delivery of credit at the most opportune time. Similarly,money market enables the commercial banks to meet much of their unexpected needsfor funds quickly and cheaply. It is possible for the commercial banks to utilize theirfunds profitably and with liquidity. FACILITATING TRADEMoney market is of immense help to the business community in the following ways:1. Providing an ideal payment mechanism making it possible for expeditious transfer oflarge sums of money.2. Meeting the working capital requirements for carrying out the production andmarketing activities.3. Making efficient investment of surplus funds into near-money assets which can bequickly converted into money as and when needed. HELPFUL TO GOVERNMENTThe government uses the money market as an arena in which short-term funds areraised by floating treasury bills. It helps the government manage its monetary positionsmoothly through the central bank of the county.
FUNCTIONS INVESTMENT FUNCTIONThe money market provides an ideal source for investment of the funds for a shortperiod of time for commercial banks, non banking financial concerns, businesscorporations and other investors. It enables businessmen, with temporary surplus funds,to invest them for a short period. FINANCING FUNCTIONMoney market provides an ideal source for short-term financing for businessmen,industrialists, traders, etc to meet their day-to-day requirements of working capital.Funds are available for borrowing by the government and its agencies also. FACILITATING FUNCTIONMoney market provides an ideal play ground for the central monetary authority of thecountry to carry out various regulatory operations relating to the banking and financialsystem of the country. The sensitive nature of the money market helps the central bankto make it an ideal arena for the execution of various credit control measures.TRADING USEThe trading area contains the main functions for entering financial transactions. You canenter transactions, call up information on existing transactions, or make changes totransactions at a later date. In the Money Market, Foreign Exchange, and Derivativesareas, you can also give notice on and roll over transactions.
PREREQUISITESYou have to enter the master data before you can create a financial transaction in thetrading area. In the Money Market, Foreign Exchange, and Derivatives areas, thismeans entering master data for the respective business partner in the role of Treasurypartner. Before you create a securities order, you must enter the issuer, the depositorybank, and the securities class data in the Securities area.INSTRUMENTSInvestment in money market is done through money market instruments. Money marketinstrument meets short term requirements of the borrowers and provides liquidity to thelenders. Some common Money Market Instruments are as follows: TREASURY BILLTreasury Bills, one of the safest money market instruments, are short term borrowinginstruments of the Central Government of the Country issued through the Central Bank(RBI in India). They are zero risk instruments, and hence the returns are not soattractive. It is available both in primary market as well as secondary market. It is apromise to pay a said sum after a specified period. T-bills are short-term securities thatmature in one year or less from their issue date. GOVERNMENT SEQURITYGovernment Securities are securities issued by the Government for raising a public loanor as notified in the official Gazette which are issued by RBI on behalf of Govt. of India(GOI). GOI uses these borrowed funds to meet its fiscal deficit, while temporary cashmismatches are met through treasury bills of 91 days.REPOSThe term Repo is used as an abbreviation for Repurchase Agreement or ReadyForward. A Repo involves a simultaneous “sales and repurchase” agreements.
BENEFITS & FEATURES1. Interest Rate Being collateralized loans, repos help reduce counter party risk &therefore, fetch a low interest rate.2. Contract The Repo contract provides the seller – bank to get money by partying withits security and the buyer – bank in turn to get the security by parting with its money. Itbecomes a Reserve Repo deal for the purchaser of the security. Securities are sold firstto a buyer bank and simultaneously another contract is entered in to with buyer torepurchase them at a predetermine date and price in future. The price of the sale andrepurchase of securities is determined before entering into deal.3. Safety Repo is an almost risk free instrument used to even out liquidity changes in thesystem. Repos offer short-term outlet for temporary excess cash at close to the marketinterest rate.4. Hedge tool As purchaser of the repo requires title to the securities for the term ofagreement and as the repurchase price is locked in at a time of sale itself. It is possibleto use repos as an effective hedge-tool to arrange the others repos or to sell themoutright or to deliver them to another party to fulfill the delivery commitment in respect ofa forward or future contract or a short sale or a maturing reverse repo.5. Period The minimum period for Ready Forward Transaction Bill will be 3 day.However, RBI withdraws this restriction for the minimum period with the effect fromOctober 30, 1998.6. Liquidity Control The RBI uses Repo as a tool of liquidity control for absorbing surplusliquidity from the banking system in a flexible way and thereby preventing interest ratearbitraging. All Repo transaction are to be effected at Mumbai only and the deals are tobe necessary put through the subsidiary General Ledger (SGL) account with theReserve Bank of India.
7. Cash Management Tool The Repo arrangement essential serves as a short – term cashmanagement tool as the bank receive cash from the buyer of the securities in return forthe securities. This helps the banker meet temporary cash requirement. This alsomakes the repo a pure money lending operation. On the maturity of the ‘repos’ thesecurity is purchased back by the seller bank from the buyer-bank by returningthe money to the buyer.MONEY MARKET ACCOUNTIt can be opened at any bank in the similar fashion as a savings account. However, it isless liquid as compared to regular savings account. It is a low risk account where themoney parked by the investor is used by the bank for investing in money marketinstruments and interest is earned by the account holder for allowing bank to make suchinvestment. Interest is usually compounded daily and paid monthly. There are two typesof money market accounts: Money Market Transactional Account By opening such type of account, the account holder can enter into transactions also besides investments, although the numbers of transactions are limited. Money Market Investor Account By opening such type of account, the account holder can only do the investments with no transactions.MONEY MARKET INDEXTo decide how much and where to invest in money market an investor will refer to theMoney Market Index. It provides information about the prevailing market rates. Thereare various methods of identifying Money Market Index like: Smart Money Market Index It is a composite index based on intraday price pattern of the money market instruments.
Salomon Smith Barney’s World Money Market Index Money market instruments are evaluated in various world currencies and a weighted average is calculated. This helps in determining the index. Banker’s Acceptance Rate As discussed above, Banker’s Acceptance is a money market instrument. The prevailing market rate of this instrument i.e. the rate at which the banker’s acceptance is traded in secondary market, is also used as a money market index. LIBOR/MIBOR London Inter Bank Offered Rate/ Mumbai Inter Bank Offered Rate also serves as good money market index. This is the interest rate at which banks borrow funds from other banks.GROWTH OF MONEY MARKET IN INDIAARTICLECapital investment is the backbone of every developing economy. It is also consideredto be one of the most important determinants of the rate of growth of an economy andthe governments in the developing countries strive very hard to ensure that the level ofcapital investment is kept high. To augment the internal investment potential, thegovernments in the Developing countries aim at achieving higher inflows of foreigninvestment, both as FDI as well as FII.
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In the past, money was generally considered to have the following four main functions, whichare summed up in a rhyme found in older economics textbooks: "Money is a matter of functionsfour, a medium, a measure, a standard, a store." That is, money functions as a medium ofexchange, a unit of account, a standard of deferred payment, and a store of value. However,modern textbooks now list only three functions, that of medium of exchange, unit of account,and store of value, not considering a standard of deferred payment as a distinguished function,but rather subsuming it in the others.There have been many historical disputes regarding the combination of moneys functions, somearguing that they need more separation and that a single unit is insufficient to deal with them all.One of these arguments is that the role of money as a medium of exchange is in conflict with itsrole as a store of value: its role as a store of value requires holding it without spending, whereasits role as a medium of exchange requires it to circulate. Others argue that storing of value isjust deferral of the exchange, but does not diminish the fact that money is a medium of exchangethat can be transported both across space and time. The term financial capital is a moregeneral and inclusive term for all liquid instruments, whether or not they are a uniformlyrecognized tender.Medium of exchangeMain article: Medium of exchangeWhen money is used to intermediate the exchange of goods and services, it is performing afunction as a medium of exchange. It thereby avoids the inefficiencies of a barter system, such asthe double coincidence of wants problem.Unit of accountMain article: Unit of accountA unit of account is a standard numerical unit of measurement of the market value of goods,services, and other transactions. Also known as a "measure" or "standard" of relative worth anddeferred payment, a unit of account is a necessary prerequisite for the formulation of commercialagreements that involve debt. To function as a unit of account, whatever is being used as moneymust be: Divisible into smaller units without loss of value; precious metals can be coined from bars, or melted down into bars again. Fungible: that is, one unit or piece must be perceived as equivalent to any other, which is why diamonds, works of art or real estate are not suitable as money. A specific weight, or measure, or size to be verifiably countable. For instance, coins are often milled with a reeded edge, so that any removal of material from the coin (lowering its commodity value) will be easy to detect.
Store of valueMain article: Store of valueTo act as a store of value, a money must be able to be reliably saved, stored, and retrieved – andbe predictably usable as a medium of exchange when it is retrieved. The value of the moneymust also remain stable over time. Some have argued that inflation, by reducing the value ofmoney, diminishes the ability of the money to function as a store of value.Standard of deferred paymentMain article: Standard of deferred paymentWhile standard of deferred payment is distinguished by some texts, particularly older ones,other texts subsume this under other functions. A "standard of deferred payment" is anaccepted way to settle a debt – a unit in which debts are denominated, and the status of money aslegal tender, in those jurisdictions which have this concept, states that it may function for thedischarge of debts. When debts are denominated in money, the real value of debts may changedue to inflation and deflation, and for sovereign and international debts via debasement anddevaluation.Money supplyMain article: Money supplyIn economics, money is a broad term that refers to any financial instrument that can fulfill thefunctions of money (detailed above). These financial instruments together are collectivelyreferred to as the money supply of an economy. In other words, the money supply is the amountof financial instruments within a specific economy available for purchasing goods or services.Since the money supply consists of various financial instruments (usually currency, demanddeposits and various other types of deposits), the amount of money in an economy is measuredby adding together these financial instruments creating a monetary aggregate.Modern monetary theory distinguishes among different ways to measure the money supply,reflected in different types of monetary aggregates, using a categorization system that focuses onthe liquidity of the financial instrument used as money. The most commonly used monetaryaggregates (or types of money) are conventionally designated M1, M2 and M3. These aresuccessively larger aggregate categories: M1 is currency (coins and bills) plus demand deposits(such as checking accounts); M2 is M1 plus savings accounts and time deposits under $100,000;and M3 is M2 plus larger time deposits and similar institutional accounts. M1 includes only themost liquid financial instruments, and M3 relatively illiquid instruments.Another measure of money, M0, is also used; unlike the other measures, it does not representactual purchasing power by firms and households in the economy. M0 is base money, or the
amount of money actually issued by the central bank of a country. It is measured as currencyplus deposits of banks and other institutions at the central bank. M0 is also the only money thatcan satisfy the reserve requirements of commercial banks.Market liquidityMain article: Market liquidityMarket liquidity describes how easily an item can be traded for another item, or into the commoncurrency within an economy. Money is the most liquid asset because it is universally recognisedand accepted as the common currency. In this way, money gives consumers the freedom to tradegoods and services easily without having to barter.Liquid financial instruments are easily tradable and have low transaction costs. There should beno (or minimal) spread between the prices to buy and sell the instrument being used as money.
Types of money Currently, most modern monetary systems are based on fiat money. However, for most ofhistory, almost all money was commodity money, such as gold and silver coins. As economiesdeveloped, commodity money was eventually replaced by representative money, such as the goldstandard, as traders found the physical transportation of gold and silver burdensome. Fiatcurrencies gradually took over in the last hundred years, especially since the breakup of theBretton Woods system in the early 1970s.
Commodity money Main article: Commodity money A 1914 British Gold sovereignMany items have been used as commodity money such as naturally scarce precious metals,conch shells, barley, beads etc., as well as many other things that are thought of as having value.Commodity money value comes from the commodity out of which it is made. The commodityitself constitutes the money, and the money is the commodity. Examples of commodities thathave been used as mediums of exchange include gold, silver, copper, rice, salt, peppercorns,large stones, decorated belts, shells, alcohol, cigarettes, cannabis, candy, etc. These items weresometimes used in a metric of perceived value in conjunction to one another, in variouscommodity valuation or Price System economies. Use of commodity money is similar to barter,but a commodity money provides a simple and automatic unit of account for the commoditywhich is being used as money. Although some gold coins such as the Krugerrand are consideredlegal tender, there is no record of their face value on either side of the coin. The rationale for thisis that emphasis is laid on their direct link to the prevailing value of their fine gold content.American Eagles are imprinted with their gold content and legal tender face value.Representative moneyMain article: Representative moneyIn 1875 economist William Stanley Jevons described what he called "representative money," i.e.,money that consists of token coins, or other physical tokens such as certificates, that can bereliably exchanged for a fixed quantity of a commodity such as gold or silver. The value ofrepresentative money stands in direct and fixed relation to the commodity that backs it, while notitself being composed of that commodity.
Fiat moneyMain article: Fiat moneyFiat money or fiat currency is money whose value is not derived from any intrinsic value orguarantee that it can be converted into a valuable commodity (such as gold). Instead, it has valueonly by government order (fiat). Usually, the government declares the fiat currency (typicallynotes and coins from a central bank, such as the Federal Reserve System in the U.S.) to be legaltender, making it unlawful to not accept the fiat currency as a means of repayment for all debts,public and private.Some bullion coins such as the Australian Gold Nugget and American Eagle are legal tender,however, they trade based on the market price of the metal content as a commodity, rather thantheir legal tender face value (which is usually only a small fraction of their bullion value).Fiat money, if physically represented in the form of currency (paper or coins) can be accidentallydamaged or destroyed. However, fiat money has an advantage over representative or commoditymoney, in that the same laws that created the money can also define rules for its replacement incase of damage or destruction. For example, the U.S. government will replace mutilated FederalReserve notes (U.S. fiat money) if at least half of the physical note can be reconstructed, or if itcan be otherwise proven to have been destroyed. By contrast, commodity money which hasbeen lost or destroyed cannot be recovered.CurrencyMain article: currencyCurrency refers to physical objects generally accepted as a medium of exchange. These areusually the coins and banknotes of a particular government, which comprise the physical aspectsof a nations money supply. The other part of a nations money supply consists of bank deposits(sometimes called deposit money), ownership of which can be transferred by means of cheques,debit cards, or other forms of money transfer. Deposit money and currency are money in thesense that both are acceptable as a means of payment.Money in the form of currency has predominated throughout most of history. Usually (gold orsilver) coins of intrinsic value (commodity money) have been the norm. However, nearly allcontemporary money systems are based on fiat money – modern currency has value only bygovernment order (fiat). Usually, the government declares the fiat currency (typically notes andcoins issued by the central bank) to be legal tender, making it unlawful to not accept the fiatcurrency as a means of repayment for all debts, public and private.
Commercial bank money Main article: Demand deposit Demand deposit in cheque form.Commercial bank money or demand deposits are claims against financial institutions that can beused for the purchase of goods and services. A demand deposit account is an account from whichfunds can be withdrawn at any time by check or cash withdrawal without giving the bank orfinancial institution any prior notice. Banks have the legal obligation to return funds held indemand deposits immediately upon demand (or at call). Demand deposit withdrawals can beperformed in person, via checks or bank drafts, using automatic teller machines (ATMs), orthrough online banking.Commercial bank money is created through fractional-reserve banking, the banking practicewhere banks keep only a fraction of their deposits in reserve (as cash and other highly liquidassets) and lend out the remainder, while maintaining the simultaneous obligation to redeem allthese deposits upon demand. Commercial bank money differs from commodity and fiatmoney in two ways, firstly it is non-physical, as its existence is only reflected in the accountledgers of banks and other financial institutions, and secondly, there is some element of risk thatthe claim will not be fulfilled if the financial institution becomes insolvent. The process offractional-reserve banking has a cumulative effect of money creation by commercial banks, as itexpands money supply (cash and demand deposits) beyond what it would otherwise be. Becauseof the prevalence of fractional reserve banking, the broad money supply of most countries is amultiple larger than the amount of base money created by the countrys central bank. Thatmultiple (called the money multiplier) is determined by the reserve requirement or otherfinancial ratio requirements imposed by financial regulators.The money supply of a country is usually held to be the total amount of currency in circulationplus the total amount of checking and savings deposits in the commercial banks in the country.In modern economies, relatively little of the money supply is in physical currency. For example,
in December 2010 in the U.S., of the $8853.4 billion in broad money supply (M2), only $915.7billion (about 10%) consisted of physical coins and paper money. Monetary policy Main article: Monetary policyWhen gold and silver are used as money, the money supply can grow only if the supply of thesemetals is increased by mining. This rate of increase will accelerate during periods of gold rushesand discoveries, such as when Columbus discovered the new world and brought back gold andsilver to Spain, or when gold was discovered in California in 1848. This causes inflation, as thevalue of gold goes down. However, if the rate of gold mining cannot keep up with the growth ofthe economy, gold becomes relatively more valuable, and prices (denominated in gold) will drop,causing deflation. Deflation was the more typical situation for over a century when gold andpaper money backed by gold were used as money in the 18th and 19th centuries.Modern day monetary systems are based on fiat money and are no longer tied to the value ofgold. The control of the amount of money in the economy is known as monetary policy.Monetary policy is the process by which a government, central bank, or monetary authoritymanages the money supply to achieve specific goals. Usually the goal of monetary policy is to
accommodate economic growth in an environment of stable prices. For example, it is clearlystated in the Federal Reserve Act that the Board of Governors and the Federal Open MarketCommittee should seek ―to promote effectively the goals of maximum employment, stableprices, and moderate long-term interest rates.‖A failed monetary policy can have significant detrimental effects on an economy and the societythat depends on it. These include hyperinflation, stagflation, recession, high unemployment,shortages of imported goods, inability to export goods, and even total monetary collapse and theadoption of a much less efficient barter economy. This happened in Russia, for instance, after thefall of the Soviet Union.Governments and central banks have taken both regulatory and free market approaches tomonetary policy. Some of the tools used to control the money supply include: changing the interest rate at which the central bank loans money to (or borrows money from) the commercial banks currency purchases or sales increasing or lowering government borrowing increasing or lowering government spending manipulation of exchange rates raising or lowering bank reserve requirements regulation or prohibition of private currencies taxation or tax breaks on imports or exports of capital into a countryIn the US, the Federal Reserve is responsible for controlling the money supply, while in the Euroarea the respective institution is the European Central Bank. Other central banks with significantimpact on global finances are the Bank of Japan, Peoples Bank of China and the Bank ofEngland.For many years much of monetary policy was influenced by an economic theory known asmonetarism. Monetarism is an economic theory which argues that management of the moneysupply should be the primary means of regulating economic activity. The stability of the demandfor money prior to the 1980s was a key finding of Milton Friedman and Anna Schwartzsupported by the work of David Laidler, and many others. The nature of the demand formoney changed during the 1980s owing to technical, institutional, and legal factors[clarificationneeded] and the influence of monetarism has since decreased.
See also Wikiquote has a collection of quotations related to: Money Look up money in Wiktionary, the free dictionary. Wikimedia Commons has media related to: Money Coin of account Currency market Electronic money Labor-time voucher Leper colony money Local Exchange Trading Systems Money bag Non-market economics Numismatics — Collection and study of money Orders of magnitude (currency) Seignorage Slang terms for money Tax World currency Protection Systems
References 1. ^ Mishkin, Frederic S. (2007). The Economics of Money, Banking, and Financial Markets (Alternate Edition). Boston: Addison Wesley. p. 8. ISBN 0-321-42177-9. 2. ^ What Is Money? By John N. Smithin . Retrieved July-17-09. 3. ^ "money : The New Palgrave Dictionary of Economics". The New Palgrave Dictionary of Economics. http://www.dictionaryofeconomics.com/article?id=pde2008_M000217&edition=current &q=money&topicid=&result_number=5. Retrieved 18 December 2010. 4. ^ a b c d e Mankiw, N. Gregory (2007). "2". Macroeconomics (6th ed.). New York: Worth Publishers. pp. 22–32. ISBN 0-7167-6213-7. 5. ^ a b c d T.H. Greco. Money: Understanding and Creating Alternatives to Legal Tender, White River Junction, Vt: Chelsea Green Publishing (2001). ISBN 1-890132-37-3 6. ^ Boyle, David (2006). The Little Money Book. The Disinformation Company. pp. 37. ISBN 978-1932857269. 7. ^ "On2 Money / A History of Money". pbs.org. http://www.pbs.org/newshour/on2/money/history.html. Retrieved 2009-04-20. 8. ^ Bernstein, Peter, A Primer on Money and Banking, and Gold, Wiley, 2008 edition, pp29-39 9. ^ Mauss, Marcel. The Gift: The Form and Reason for Exchange in Archaic Societies. pp. 36-37. 10. ^ Graeber, David. Toward an Anthropological Theory of Value. pp. 153-154. 11. ^ Kramer, History Begins at Sumer, pp. 52–55
ConclusionThe money market specializes in debt securities that mature in less than one year.Money market securities are very liquid, and are considered very safe. As a result, theyoffer a lower return than other securities.The easiest way for individuals to gain access to the money market is through a moneymarket mutual fund.T-bills are short-term government securities that mature in one year or less from theirissue date.T-bills are considered to be one of the safest investments - they dont provide a greatreturn.A certificate of deposit (CD) is a time deposit with a bank.Annual percentage yield (APY) takes into account compound interest, annual percentagerate (APR) does not.CDs are safe, but the returns arent great, and your money is tied up for the length of theCD.Commercial paper is an unsecured, short-term loan issued by a corporation. Returns arehigher than T-bills because of the higher default risk.Bankers acceptances (BA)are negotiable time draft for financing transactions in goods.BAs are used frequently in international trade and are generally only available toindividuals through money market funds.Eurodollars are U.S. dollar-denominated deposit at banks outside of the United States.The average eurodollar deposit is very large. The only way for individuals to invest inthis market is indirectly through a money market fund.Repurchase agreements (repos) are a form of overnight borrowing backed by governmentsecurities.