Question

1. What is money and list the three functions of money? Which function is the most important?

2. Describe the organizational structure and functions of the Federal Reserve Syste

3. What is the difference between money market instruments and capital market instruments?

Answer 1

1.

Money is any good that is widely accepted in exchange of goods and services, as well as payment of debts. Most people will confuse the definition of money with other things, like income, wealth, and credit.

Three functions of money are:

1. Medium of exchange:

Money can be used for buying and selling goods and services. If there were no money, goods would have to be exchanged through the process of barter (goods would be traded for other goods in transactions arranged on the basis of mutual need). For example: If I raise chickens and want to buy cows, I would have to find a person who is willing to sell his cows for my chickens. Such arrangements are often difficult. But Money eliminates the need of the double coincidence of wants.

2. Unit of account:

Money is the common standard for measuring relative worth of goods and service.

3. Store of value:

Money is the most liquid asset (Liquidity measures how easily assets can be spent to buy goods and services). Money’s value can be retained over time. It is a convenient way to store wealth.

Medium of Exchange is most important

2. Federal Reserve System

The Federal Reserve System is composed of five parts:

1. The presidentially appointed Board of Governors (or Federal Reserve Board), an independent federal government agency located in Washington, D.C.
2. The Federal Open Market Committee (FOMC), composed of the seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank presidents, which oversees open market operations, the principal tool of U.S. monetary policy.
3. Twelve regional Federal Reserve Banks located in major cities throughout the nation, which divide the nation into twelve Federal Reserve districts. The Federal Reserve Banks act as fiscal agents for the U.S. Treasury, and each has its own nine-member board of directors.
4. Numerous other private U.S. member banks, which own required amounts of non-transferable stock in their regional Federal Reserve Banks.
5. Various advisory councils.

Functions

They are to provide and maintain an effective payments system, supervise and regulate banking operations, and conduct monetary policy.

3.

Money markets are used by government and corporate entities as a means for borrowing and lending in the short term, usually for assets being held for up to a year. Conversely, capital markets are more frequently used for long-term assets, which are those with maturities of greater than one year.

Capital markets include the equity (stock) market and debt (bond) market. Together, money markets and capital markets comprise a large portion of the financial market and are often used together to manage liquidity and risks for companies, governments and individuals.