NAME: Muhammad Hasnain Ali

ASSIGNMENT#3
SUBMITTED TO: SIR DR. FAIZAN

Money
Money is any good that is widely used and accepted in transactions involving the
transfer of goods and services from one person to another. Economists differentiate
among three different types of money: commodity money, fiat money, and bank
money. Commodity money is a good whose value serves as the value of money.
Gold coins are an example of commodity money. In most countries, commodity
money has been replaced with fiat money. Fiat money is a good, the value of
which is less than the value it represents as money.

Medium exchange
A medium of exchange is a function of money that expedites trade between a
buyer and seller because it is widely accepted as payment for a good or service.
Most societies use their currency, but stones, salt, gold, and tobacco have been
used as a medium of exchange. Most economies use their currency as their
medium of exchange because people recognize its value. A business or person
accepts money knowing it can be exchanged for other goods and services. A
medium of exchange should have a standard value so it is easy to compare values
between goods and services. Currency in and of itself has no value. You cannot eat
currency, nor can you wear currency, but it can be used to purchase food and
clothing because it is accepted as a medium of exchange.

Unit of account
A unit of account is a standard monetary unit of measurement of value/cost of
goods, services, or assets. It is one of three well-known functions of money. It
lends meaning to profits, losses, liability, or assets. The accounting monetary unit
of account suffers from the pitfall of not being a stable unit of account over time.
Inflation destroys the assumption that money is stable which is the basis of classic
accountancy. In such circumstances, historical values registered in accountancy
books become heterogeneous amounts measured in different units. The use of such
data under traditional accounting methods without previous correction often leads
to invalid results.

Currency
Currency refers to money, that which is used as a medium of exchange for goods
and services in an economy. Before the concept of currency was introduced, goods
and services were exchanged for other goods and services under the barter system.
Bartering made it quite difficult to accurately determine the value of any given
good or service or track the evolution in the value of a good/service over the course
of time. The development of money as a medium of exchange created a much more
efficient economy By placing a single, monetary value on a good/service, it
became much easier to determine its relative value. Currency, thus, became widely
used across the globe and facilitated trade between nations

Depositary institutions
Depository institutions come in several different types. Anytime you give your
money to someone with the expectation that the person will hold it for you and
give it back when you request it, you’re either dealing with a depository institution
or acting very foolishly. Depository institutions all function in the same basic
manner:
They accept your money and typically pay interest over time, though some
accounts will provide other services to attract depositors in lieu of interest
payments. While holding your money, they lend it out to other people or
organizations in the form of mortgages or other loans and generate more interest
than they pay you .When you want your money back, they have to give it back.
Fortunately, they usually have enough deposits that they can give you back what
you want. That’s not always true, as everyone saw during the Great Depression,
but it’s almost always the case.

Commercial bank
A commercial bank is a financial institution that provides deposit, current, and
saving accounts. A current account is the same as a checking account. A
commercial bank serves individuals, organizations, and businesses. It also lends
money. In the United Kingdom, people also call it a high street bank.
The term may be ambiguous. Some people say a commercial bank is a bank’s
division that just deals with companies.
Commercial banks make money by taking short-term deposits and turning those
funds into bigger, long-term maturity loans. This process, which transforms their
assets, generates income. In other words, they make a profit by taking people’s
money and lending it.

Thrift institution
Thrift institutions include savings and loan associations, savings banks, and credit
unions. Thrifts were originally established to promote personal savings through
savings accounts and homeownership through mortgage lending, but now provide
a range of services similar to many commercial banks. Savings banks tend to be
small and are located mostly in the northeastern states.
Like other banking institutions with a significant portion of mortgages on their
books, thrifts may belong to the Federal Home Loan (FHL) Bank System. In
exchange for holding a certain percentage of their assets in mortgage-backed
securities and residential mortgages, these financial institutions may borrow funds
from the FHL Bank System at favorable rates.

Federal reserve system

The Federal Reserve System (FRS) is the U.S.'s central bank. The Federal Reserve
manages the economy's money supply, regulates the banking industry, acts as a
clearinghouse for checks and other payments conducted through the banking
system, operates the U.S. Mint and provides banking services to the U.S.
government.
The Federal Reserve was created by the Federal Reserve Act of 1913 after years of
national financial crises caused massive deposit withdrawals by bank customers
and widespread bank failures. Several subsequent pieces of legislation clarified and
added to the Federal Reserve's responsibilities.
Not all banks are members of the Federal Reserve system, but the Monetary
Control Act of 1980 made the difference between members and nonmembers
nominal: all depository institutions must maintain reserves within the Federal
Reserve system and may use certain Federal Reserve payment services.
Financial innovation
Financial innovation is the creation of new financial instruments, technologies,
institutions, and markets. As in other technologies, innovation in finance includes
research and development functions as well as the demonstration, diffusion, and
adoption of these new products or services.
In finance, particularly, innovation involves adapting and improvising on existing
products and concepts. Advances emerge initially as either products (such as
derivatives, high-yield corporate bonds, and mortgage-backed securities) or
processes (such as pricing mechanisms, trading platforms, and means and methods
for distributing securities). By moving funds or enabling investors to pool funds,
these tools increase liquidity to facilitate the sale and purchase of goods or the
management of risks in markets and enterprises.

Monetary policy
Monetary policy is a central bank's actions and communications that manage the
money supply. The money supply includes forms of credit, cash, checks, and
money market mutual funds. The most important of these forms of money is credit.
Credit includes loans, bonds, and mortgages. Monetary policy increases liquidity to
create economic growth. It reduces liquidity to prevent inflation. Central banks use
interest rates, bank reserve requirements, and the number of government bonds that
banks must hold. All these tools affect how much banks can lend. The volume of
loans affects the money supply.

How bank create money

Banks can create money through the accounting they use when they make loans.
The numbers that you see when you check your account balance are just
accounting entries in the banks’ computers. These numbers are a ‘liability’ or IOU
from your bank to you. But by using your debit card or internet banking, you can
spend these IOUs as though they were the same as £10 notes. By creating these
electronic IOUs, banks can effectively create a substitute for money. Commercial
i.e. high-street banks create money, in the form of bank deposits, by making new
loans. When a bank makes a loan, for example to someone taking out a mortgage
to buy a house, it does not typically do so by giving them thousands of pounds
worth of banknotes. Instead, it credits their bank account with a bank deposit of the
size of the mortgage. At that moment, new money is created.

The market for money

Money market basically refers to a section of the financial market where financial
instruments with high liquidity and short-term maturities are traded. Money market
has become a component of the financial market for buying and selling of
securities of short-term maturities, of one year or less, such as treasury bills and
commercial papers. Over-the-counter trading is done in the money market and it is
a wholesale process. It is used by the participants as a way of borrowing and
lending for the short term. Money market consists of negotiable instruments such
as treasury bills, commercial papers. and certificates of deposit. It is used by many
participants, including companies, to raise funds by selling commercial papers in
the market. Money market is considered a safe place to invest due to the high
liquidity of securities.

The quantity theory of money

The quantity theory of money is a theory that variations in price relate to variations
in the money supply. The most common version, sometimes called the "neo-
quantity theory" or Fisherian theory, suggests there is a mechanical and fixed
proportional relationship between changes in the money supply and the general
price level. This popular, albeit controversial, formulation of the quantity theory of
money is based upon an equation by American economist Irving Fisher.

Understanding the Quantity Theory of Money

The Fisher equation is calculated as:

M=money supply

V=velocity of money

P=average price level

T=volume of transactions in the economy