Main Points §

• Money: the set of assets used to buy goods and services from one another.
• Functions of Money:
  • Medium of Exchange: a widely accepted form of money (eg. Bills, coins…)
  • Unit of Account: ability to use the money to measure the value of goods and services
  • Store of Value: how well the medium will maintain its value over time.
• 2 Types of Money
  • Commodity Money: are items that are naturally valuable even if its not being used as a currency such as gold
  • Fiat Money: are currency without intrinsic value and is given value by the government.
• Central bank: an institution that oversees the banking system and regulate money supply.
  • Functions of Central Bank
    • Regulate Private banks: set minimum capital & reserve requirements
    • Regulate Money Supply: to balance money supply and avoid bank system failure
• Money Multiplier= $\frac{1}{ReserveRatio}$
• Leverage: borrowing money to supplement existing money to invest
  • Leverage Ratio= $\frac{Asset}{Equity}$
• Conventional Monetary Tools
  • Open-Market Operations (OMOs): Buying/Selling bonds to increase/decrease Money Supply
  • Reserve Ratio: Lower/Heighten Reserve Ratio to increase/decrease money supply
• Unconventional Monetary Tools
  • Quantitative Easing: useful for recovering from financial crisis
    • Inject Money: buy vast amounts of government bonds to flood economy with currency
    • Subtract Money: selling bonds and lowering bond interest rates.
• Discount Rate: the rate of giving interest to borrowers and charging people for depositing in banks to increase money supply.