The Monetary System
May 10, 2015
Jenna Hutchinson My paper will focus on the monetary system and all of its aspects. This will include the relationship between the supply of money and the economic activity.
There are three ways that money is transferred from the savers to businesses. One way that money is transferred by savers is through direct purchases of securities of businesses. A direct purchase is the transferring of money and securities between businesses with no financial institution involved in the process. The second is the most common way this is the way money is transferred through indirect purchases of securities by the savers to the investors. In this process it involves an investment banking firm. The last one is the way money is transferred through a financial institution instead of an investment banking firm it is still an indirect purchases. Money invested with financial institutions such as a bank, insurance company or mutual fund. “The financial intermediary issues its own securities to the saver. For example, a saver may give money in the form of currency to a bank in exchange for the bank’s certificate of deposit (CD). The bank, in turn, may lend money to a business firm in exchange for that firm’s “I owe you” (IOU) in the form of a loan. As money passes from savers through a financial institution to a business firm, a debt instrument or security is created by the financial institution and by the business firm.” (Ch. 2, Institutions and Markets)
As we look into the monetary system, we see that banks are the key in a majority of each topic discussed. Banks are very important because they are the one that creates and transfers money, provide financial intermediation, and they also process/clears checks. In the monetary system money plays an important role because money is “anything generally accepted as a means of paying for food and services and paying off debts.” (Ch. 2,…