Financial markets and monetary policy

Characteristic and functions of money

1. Medium of exchange

2. Store of wealth

3. Unit of account

4. A standard of deferred payment

Money supply

The total amount of money circulating the economy

Types of money supply

1. Narrow money

2. Broad money

Liquidity

Measures the ease with which assets are converted to cash without loss of value

Spectrum of liquidity

1. Cash

2. Current account

3. Treasury bills

4. House/cars/shares

Narrow money

This restricts the measure of money, cash, bank and building society deposits in current account

Broad money

Narrow money plus ‘near monies’ such as time deposits with banks and building society (saving accounts)

Near money (Quasi money)

Described highly liquid non-cash assets such as bank deposits, certificate of deposits and treasury bills. These assets can be converted into cash quickly

Financial markets

1. Markets in which financial assets or securities are traded. For example, capital and foreign exchange

The fundamental purpose of financial markets

The core purpose of financial markets is to channel funds from those who have surplus funds to those who have a shortage of funds

Security

It secures a claim against a person