Unit VI Assessment



Unit VI Assessment

Question 1

Money is a medium of exchange through which transaction take place, for instance exchange of goods and service and debt payments. The concept and definition of money confused with items such as income, wealth, and credit. According to book, the three main function of money are Medium of exchange, unit of account and store of value. This does not consider standard of deferred payment as a separate function (McEachern, 2012).

Medium of Exchange: Money as a medium of exchange facilitates transactions. Without money, exchange of goods and services has to be carried out through barter system. This has offered society various advantages in terms of convenience, provide transactional efficiency, freedom of choice to individual and it eliminate double coincidence of wants.

Unit of Account: This function provides a common standard for measuring value of goods and services that exchanged. The importance of this function is that it shows the worth of the goods and services to suppliers as well to the purchasers, Fungible i.e. the goods or services have a capacity of exchange or interchange. In order words, it is a common unit to measure money (Wallach, Tattersall, 2011).

Store of value: Money is very liquid assets i.e. it can easily spend and easy to store. This function is important as it provides security to individuals for meeting their un-predictable emergencies. This also offers assurance to individuals as it can be retained and easiest ways to store wealth.

Question 2

Money supply in a country controlled by FED. FED uses three ways for controlling the money supply, and one of them is using the discount rate. Discount rate is the interest rate that charged over loans/borrowing and this discount rate assures stability in the financial market. Banks usually borrow from Federal Reserve when they over commit themselves to meet up their reserve requirement. The rate of interest charged on these loans if increased by FED then banks would not be able to afford such borrowing, and hence they have to increase their own lending rates. This will lead to reduce money flow in the economy as people would avoid borrowing money at higher interest rate. Similarly, if FED reduces their discount rate, the financial institution would be having more money. This clearly highlights that the discount rate has a snowball effect which means that when discount rate increase, other interest rate will also increase keeping other things constant. ...