Understanding Money and the Financial System
The Funding Process
To consume or invest, financial resources are needed. The savings are produced by the members of a family. Companies and the state sometimes save. Why do people save? One reason is uncertainty. Saving is produced by all players, but most of the savings are done by families. The financial system consists of a set of institutions that mediate the money.
Financial intermediaries issue a series of instruments called financial assets because they generate a series of rights to their holders.
Mintage
Mintage is to record the coin with a face and a seal, also the hillocks of the contour.
The Money Sign
In the process of the evolution of money, the money sign appears, whose value is the paper that is printed. The money sign is an asset that is worth very little. Paper money and banks have their origin in the Middle Ages. Over time, these receipts are issued in bearer form, and purchases and sales are settled with paper.
Paper money comes nominally converted into gold because it is easier to perform transactions on paper. Banks began to issue paper (worth more than the gold they actually possess). In issuing paper volumes only partially covered by its gold reserves, money is created in gold.
Money in the Current Financial System
Banknotes and coins have no cash back. The current value of money lies in the confidence that others will accept it because things change that others will accept it. If that trust disappears, the tickets would not be worth anything. This money has come to pay and created a functioning banking deposit as payment.
People accept checks. The money note is a method of exchange to pay debts of a company or person.
Legal Money
It is the token money issued by an institution that monopolizes broadcast.
Bank Money
Deposits in banks that are generally accepted as payment.
Monetary Aggregates
We can distinguish the following types of deposits:
- Demand deposits: Amounts of money deposited in the bank that have immediate availability.
- Savings deposits: Those for whom their owners can immediately have available, but with restrictions on availability. They are popularly known as passbook savings.
- Time deposits: Those whose owner is committed to keeping them for a fixed term in exchange for a fee and cannot have them until after this period without receiving a penalty.
To avoid this, we defined the amount of money or money supply: Amount of cash held by the public + deposits of banks.
To measure the money supply is a series of additions:
- M1: Currency held by the public + demand deposits in banks.
- M2: M1 + savings deposits in credit institutions.
- M3: M2 + time deposits
The latest monetary aggregate:
Liquid assets held by the public (ALP): M3 + other components, among them Treasury bills held by the public, commercial paper, etc.
Cash in the hands of the credit system is bank reserves, and the sum of these with the cash held by the public forms the basis of currency.
Functions of Money
It has 3 basic functions:
- Medium of exchange: It allows greater flexibility in transactions and canceling debt. Facilitates the exchange and eliminates the exchange.
- Unit of account: Used to fix the prices of things and set the value of all goods. Example: the euro.
- Store of value: Not only facilitates transactions, and how everything that facilitates transactions is called a financial asset. One of the ways to maintain wealth. People have a portion of its assets or wealth in the form of money that is purely liquidity. Example: an action.
Ownership Costs of Money
People give so much importance to money that they are willing to face a cost-effective or have liquid accounts; this is the opportunity to cut money. The rate of interest is the rental price of capital borrowed and was expressed in the percentage of the amount borrowed. People have to pay for having borrowed money. Its function is to maintain the flow of deposits.