Currency: Financial Market Refers To The Place Where Creation and Exchange of Financial Instruments

MONEY and BANKING SYSTEM
Coins and currency in the hands of the public, together with all checking accounts, are the only items that perform all four of the functions of money. Medium of exchange, Measure or standard of value, Store of value, Standard of deferred payment.
However, numerous other things perform some of the functions of money but not all four. In recent years a small but growing number of economists have broadened their definition of money to include some of these other items, which are really "near money" or money substitutes. This has resulted in several definitions of the money supply, labeled M1, M2, and M3. The debate over how to define the money supply really has to do with whether or not savings deposits should be included in it. M1 stands for the traditional definition of the money supply and consists of: M1 = coins + current accounts + notes + deposit accounts transferable by cheque M2 = M1 + non-interest-bearing bank deposits + National Savings accounts + buildingsociety deposits M3 = M1 + certificates of deposit + all private-sector bank deposits M4 = M1 + most private-sector bank deposits + holdings of money-market instruments M3 c (broad money informal name) it is the symbol for the amount of money in circulation given by M3 + foreign currency bank deposits.
Financial market refers to the place where creation and exchange of financial instruments take place. E.g, stock exchanges & markets for transaction of stocks, bonds, foreign exchange. 2 braod parts of financial market :
(1) Money market deals mainly with short-term debt instruments such as Treasury Bills, commercial paper,banker's acceptance and certificate of deposits.(maturity period <= 1year ) (2) Capital market on the other hand mainly deals with equity and long-term debt securities ( maturity period > 1 year )
MONETARY POLICY: Monetary policy is one of the tools that a national Government uses to influence its economy. It controls the supply and availability of money. Goals of monetary policy : macroeconomic stability, low unemployment, low inflation, economic growth, and a balance of external payments.
Operations of a Modern Central Bank The Central Bank attempts to achieve economic stability by varying the quantity of money in circulation, the cost and availability of credit, and the composition of a country's national debt. The Central Bank has three instruments available to it in order to implement monetary policy: 1. Open market operations 2. Reserve requirements 3. The 'Discount Window' Open market operations are just that, the buying or selling of Government bonds by the Central Bank in the open market. If the Central Bank were to buy bonds, the effect would be to expand the money supply and hence lower interest rates, the opposite is true if bonds are sold. This is the most widely used instrument in the day to day control of the money supply due to its ease of use, and the relatively smooth interaction it has with the economy as a whole.
Reserve requirements are a percentage of commercial banks', and other depository institutions', demand deposit liabilities (i.e. chequing accounts) that must be kept on deposit at the Central Bank as a requirement of Banking Regulations. Though seldom used, this percentage may be changed by the Central Bank at any time, thereby affecting the money supply and credit conditions. If the reserve requirement percentage is increased, this would reduce the money supply by requiring a larger percentage of the banks, and depository institutions, demand deposits to be held by the Central Bank, thus taking them out of supply. As a result, an increase in reserve requirements would increase interest rates, as less currency is available to borrowers. This type of action is only performed occasionally as it affects money supply in a major way. Altering reserve requirements is not merely a short-term corrective measure, but a long-term shift in the money supply. Lastly, the Discount Window is where the commercial banks, and other depository institutions, are able to borrow reserves from the Central Bank at a discount rate. This rate is usually set below short term market rates (T-bills). This enables the institutions to vary credit conditions (i.e., the amount of money they have to loan out), there by affecting the money supply. It is of note that the Discount Window is the only instrument which the Central Banks do not have total control over. By affecting the money supply, it is theorized, that monetary policy can establish ranges for inflation, unemployment, interest rates ,and economic growth. A stable financial environment is created in which savings and investment can occur, allowing for the growth of the economy as a whole.

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MONEY and BANKING SYSTEM

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