Money

Credit cards and debit cards are not considered to be form of money.  The Federal Reserve Bank explains the three definitions of money, consisting of M1, M2 and M3 which are measures of money supply. M1 comprises of the currency in public hands including various deposits such as demand deposits, against which they write a check.  M2 consists of M1, in addition to time deposits below $100,000 and other balances “money market mutual funds” (Amadeo, 2018). The M3 comprises of M2 in addition to time deposits in large –denominations, Institutional money funds balances, various repurchase liabilities given out by depository firm and Eurodollars.  The credit and debit cards do not belong to any of these measures of money supply hence are not viewed as forms of money supply.  Debit cards are usually linked to the holders’ bank account and the money they spend is deducted from their accounts (Chand, n.d).  They are alternative to money (cash) more so if the holder does some online shopping. On the other hand, credit cards enable a person to money belonging to another person to pay for products or services and then repay the money later. Since the card allows for credit purchases, it has attached interest rates unless the holder of card pays within the stipulated billing period.  The issuer of the card pays for the products on behalf of the holder. The obligation that the card holder has for payment either presently or in future cannot be considered as money.  The obligation is to pay the issuer of the credit card (Chand, n.d).  The part of transaction considered as money arises between the two after the holder of credit card pays.

 That money supply will finally decrease by a fraction if the change in monetary base after open market purchase by the Fed is a false statement.  To begin with, when the Fed purchases the government securities in an open market, the amount of money in supply will increase but not decrease. Secondly, the results through money multiplier shows that the change in supply of money will increase so that it is greater than the first monetary base change. The purchase in an open market indicates that the government is purchasing securities from the market ( the public and banks)  the Fed will  eventually pay money for these securities which means that more is being released into the hands of the public (Amadeo, 2018). Moreover, after making the purchases, the supply of money will increase by multiple times, in relation to the money initially paid by the FED.

The purchase of the securities aims at increase the reserves of the bank so that more money is available for the banks to loan out in the market (Amadeo, 2018).  In this case, there will be an increase in the yields of the bank reserves which is equal to the increment in the monetary base but not a fraction of the same. Then, when the banks give out the moneys as loans in the open market, the amount of money in supply will be more by a multiple of the same quantity.  Thus, the increase in the quantity of the money will be equal to monetary base change times the applicable money multiplier.  The assumption is that the individuals and business borrowing the money from the financial institutions aims at spending the money (Amadeo, 2018). As they buy products in the market, the income for individuals, firms and their employees increase indicating an increase in the amount of money in circulation.  

The three major tools that the Fed can use to increase the money supply in the market include the Open Markets Operations, Reserve requirements and discount rate.  The Open Market Operations involves the Fed’s purchasing the government securities which in turn affect the amount of reserves in the banking sector (Amadeo, 2018).  When the Federal Reserve purchases more securities from the banks, the bank’s reserves increase which means that more money is available for lending to individuals and firms in the market.  Open market in this case means that the Federal Reserve has no power to decide which dealer of the securities it can conduct business with on a given day.  The choice stems from a market in which there various securities dealers who are competing and the Fed buys the securities from any of them and this providing them with more money that they can use to lend. The firms and individuals who buy borrow the money use it to buy goods and services in the marker thus increasing the quantity of money in circulation (Amadeo, 2018).

The Fed also uses the Reserve Requirement which means the money every bank should hold each day.  The Federal Reserve can maintain the reserve requirement low so that to enable the banks to lend out more of the available deposits (Amadeo, 2018). The reduction of the reserve requirement creates credit for the market.  The Fed targets the lending rate which has the same results as alteration in reserve requirement. If a certain bank is able to meet the set reserve requirement, it can borrow from other banks with excess cash which also help in increasing money supply. The discount rate refers to rate if interest charged on banks from any loans obtains from the Federal Reserve Bank over the short-run (Amadeo, 2018).  An increase in the discount rate makes the borrowing from the bank very costly which means that the banks will access less money. Thus, there will be less money available for lending to the individuals and firms in the market.

The above explanation fits an expansionary monetary policy whose main aim is to increase money supply, and reducing the interest rates. The reduced interest rates make it possible for individuals and firms to borrow from the banks.  The reduced rate of interests means that firms can increase their investments while consumers can spend more on goods and services.  In addition, the lower rates of interest means that the mortgage interest costs will be lower and thus encouraging repayments. The households will be given more disposable income which encourages more spending (Carbaugh, 2009).  The incentive to save among the consumers is reduced since they can easily obtain more funds.  The value of dollar will also decline which means that exports will be cheaper and this increases the demand for exports in the country.  The lower dollar value means that the exchange rate will also be lower. Moreover, the financial account for the country will be weakened and the current account will be strengthened (Carbaugh, 2009). A restrictive policy would bring about opposite results where interest rates will be higher and money supply will be lower.

References

Amadeo, K., (2018).Federal Reserve Tools and How They Work. Retrieved from: https://www.thebalance.com/federal-reserve-tools-and-how-they-work-3306134

Amadeo, K., (2018). Monetary Policy Tools: How They Work, US Economy. Retrieved from: https://www.thebalance.com/monetary-policy-tools-how-they-work-3306129