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Money and the Economy - Essay Example

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Money and the Economy

Accordingly, three types of money are recognized in the economy. These classifications are M1, M2, and M3. M1 is the narrowest measure of money which includes currency, checking account deposits and travelers checks. The M2 includes the M1 plus other assets that have check-writing features such as small-denomination time deposits, savings deposits and money market accounts, and money market mutual fund shares (noninstitutional). The M3 monetary aggregate is composed of M2 plus large denomination time deposits, term repurchase agreements, term Eurodollars and institutional money market mutual fund shares (Mishkin 57- 59).
The amount of money in the economy is very important to policy makers. The Federal Reserve is the primary institution which is tasked to control the level of money in the economy. ...Show more

Summary

Traditionally, money has three main uses in the economy. As a medium of exchange, money is used as payment for goods and services. It facilitates trade by lowering transaction costs which could hinder the smooth exchange of goods and services. As a unit of account, money provides a common and acceptable measure in valuing goods and services…
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Money and the Economy essay example
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