Quiz 13: Money and the Banking System

Business

Money is an asset that can be easily converted into goods and services. Money in any economy serves three purposes. It can works as units of account, medium of exchange and also has store value. People want to hold money because of three reasons ? Transaction purpose ? Precaution purpose ? Speculative purpose A liquid asset is one that can be converted into goods and services without significant loss of values and with minimum transaction costs. Therefore, "this asset is liquid" means the asset can be converted into other asset or goods and services without loss of value and minimum transaction costs. Money and deposit held in the checking deposits is the most liquid asset and real estate and bonds etc. are most illiquid form of asset.

Money is an asset that can be easily converted into goods and services. Money in any economy serves three purposes. It can works as units of account, medium of exchange and also has store value. People want to hold money because of three reasons ? Transaction purpose ? Precaution purpose ? Speculative purpose The money supply is the total amount of money in the economy. There are two definition of money supply: • M1 money supply • Broader M2 money supply The M1 is the narrowest definition of money supply. The M1 money supply includes currency in circulation, checkable deposits, and traveler's check. The M1 money supply includes all those form of money that is comparatively more liquid and can easily be used as medium of exchange. Therefore, to be included into M1 supply of money the asset has to be liquid. The M1 money supply includes all those form of money that is comparatively more liquid and can easily be used as medium of exchange. The interest earning checkable deposit can be withdrawn by writing checks to readily be used as medium of exchange and can be used in day to day transaction. On the other hand, the interest-earning-saving deposit and Treasury bill cannot be used in transaction and cannot be used as medium of exchange.

Money is an asset that can be easily converted into goods and services. Money in any economy serves three purposes. It can works as units of account, medium of exchange and also has store value. People want to hold money because of three reasons ? Transaction purpose ? Precaution purpose ? Speculative purpose Money is valuable because of two reasons: One. Government designates it as 'legal tender', meaning it can be used to pay debt. Two. It reduces the cost of exchange and can readily be converted into goods and services. The value of money, like all goods and services, is determined through demand and supply in the market. As for all goods and services the increase in supply, given the demand for goods, reduces its value in the market. Therefore, if money supply is doubled in the economy it will lose its value. Therefore, the money cannot perform well if it loses its value in the economy.

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