Everyone uses money. While the creation and growth of
money seems somewhat intangible, money is the way we get the things we need and
want. Here we look at the multifaceted characteristics of money. (Get A Short-Term Advantage In The Money Market. What is Money? If we think
about this relationship between money and gold, we can gain some insight into
how money gains its value: like the beaver pelts and dried corn, gold is
valuable purely because people want it.
Fiat money was
introduced because gold is a scarce resource and economies growing quickly
couldn't always mine enough gold to back their money requirement. Fiat money,
then becomes the token of people's apprehension of worth - the basis for why
money is created. M2 – With broader criteria, this category adds all the money
found in M1 to all time-related deposits, savings deposits, and
non-institutional money-market funds. This
category represents money that can be readily transferred into cash.
M3 – The
broadest class of money, M3 combines all money found in the M2 definition and
adds to it all large time deposits, institutional money-market funds,
short-term repurchase agreements, along with other largerliquid assets.
By adding these three categories together, we arrive
at a country's money supply, or total
amount of money within an economy.
How Money is
Created
Now that we've discussed why and how money, a representation of perceived value, is created in the economy, we need to touch on how the central bank (theFederal Reserve in the U.S.) can manipulate the money supply.
Now that we've discussed why and how money, a representation of perceived value, is created in the economy, we need to touch on how the central bank (theFederal Reserve in the U.S.) can manipulate the money supply.
When the central bank buys
these government securities, it puts money in the hands of the public. To
shrink the money supply, the central bank does the opposite and sells government
securities. The money with which the buyer pays the central bank is essentially
taken out of circulation. So even though technically it can create money
"out of thin air," the central bank cannot simply print money as it
wants.
source: http://www.investopedia.com/articles/basics/03/061303.asp
