1) Store of Value function s that money retains its value and can be stored for future purchases without any alteration to its value. However, as inflation rises the value of money decreases. This change in value of money means that whatever you can buy with it now, you cannot buy with it in future and hence inflation makes money an imperfect store of value. 2) Traveler Checks are classified as money because they are back by money. Credit cards transactions, on the other hand, are not backed by money.
The payment for these transactions is made at the end of the money and till that time there is nothing valuable or money to back these transactions and hence credit cards are not classified as money. 3) The most important factor that give value to money is that it is a legal tender. Money also gains value from the fact that it is acceptable as medium of exchange and is scarce. All of these characteristics of money give value to notes and coins that we use. 4) The higher the reserves, the less is banks’ capacity to extend loans to its perspective borrowers.
Since, much of banks’ business depends upon loaning out their excess money and to earn spread, this reduction in banks’ capacity to extend loans hurt them and they try to keep reserves as low as possible to make as much loans as possible. 5) This is because of the money multiplier that sets in after the loan is made. The bank simply has to credit the money into the account of a borrower without actual movement of money taking place.
This results in double entry and double credit of account both in the depositor and borrower. As a result of this, the money supply is increased by an amount that is greater than initial loans depending on the reserve ratios and the size of money multiplier. 6) The discounts rates are basically interest rate of factors at which debts can be sold and bought. This buying and selling of debts is called discounting. The higher the discount rate, the more attractive they will be for buyers to buy these debts and vice versa.
Hence the Federal Reserve watches them closely and use them as a tool to increase or decrease the money supply in the economy. 7) The lowering of discount rates will make it more beneficial for firms to sell their debts and enjoy liquidity without losing much. Open Market purchases are going to pump money into the economy and people purchasing power will increase which will have a positive effect on construction industry also. 8) Anti-inflation policies are usually aimed at reducing money supply in the economy. This decreased money supply in the economy reduces the purchasing power of people and businesses face plummeting demand.
In order to counter reducing demand, the firm’s reduce their output and hire fewer workers and hence unemployment occurs. 9) This will lead towards dollarization and people will invest in dollar. This investment Is going to increase the demand of dollar and hence dollar rate will rise benefiting both the U. S government and its citizen.