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Money, Government Securities, Recession

Money, Credit, and Debit Cards

According to the definition given in the Merriam-Webster (2017), money is something that is accepted as an exchange medium, a measure of value, or a method of payment. To answer the question of whether credit or debit cards are forms of money, it is also important to give definitions to the two concepts and differentiate between them. Debit cards draw money from a buyer’s checking account when a purchase is being made; this is done by placing a hold on the acquisition amount. Then, the transaction is sent to the bank of the buyer for confirmation. Credit cards, on the other hand, are used by customers for borrowing small amounts of money from banks. The credit card’s bank charges interest on the customers’ purchases. Therefore, the fundamental difference between debit and credit cards is that debit cards offer the same convenience of not carrying cash around without the need of borrowing money for completing everyday transactions (Caldwell, 2017). While it can be complicated to determine when a debit or credit card should be used, some can argue that credit cards are much safer regarding requests for returns and refunds.

Credit cards cannot be exchanged for goods since they act as storage tools for customers’ accounts; however, they do not fulfill the primary purpose that money does. Both debit and credit cards are tools for transferring money from one entity to another and do not meet the characteristics of serving as the means of exchange (as specified by the definition of money). Even though neither debit nor credit cards satisfy the criteria of serving as the means of exchange, they are durable, make the carrying of money easier, are non-perishable, and offer increased protection from forgery.

Government Securities

Open market operations (OMO) are associated with selling and purchasing government securities in the open market economy to increase the amount of money. Such operations are usually facilitated and supported by the Federal Reserve (the Fed). It is important to mention that purchasing government securities stimulate the growth of the banking system through the injection of money while selling has the opposite effect on the economy. The key goal of the Federal Reserve is to use OMOs for making slight changes in the federal fund’s rate (the rate at which reserves are borrowed from one bank to another) (“Open market operations – OMO,” n.d.).

The statement that the quantity of money will decrease by the amount of the change in the monetary base in the case when the Federal Reserve makes an open market purchase of government securities is false. As mentioned previously, the purchase under the open market by the Fed is associated with buying securities from the public or banks. In this case, the Federal Reserve pays money for securities, which subsequently increases the amount of money for banks and the public, contributing to the increase in the supply of money. Moreover, when open market purchases are made, the supply of money will increase by the deposit ratio of the money the Federal Reserve paid. The deposit ratio includes the reserve ratio, excess reserve ratio, and currency ratio.

Increasing Money Supply

Monetary policies are regarded as tools for central banks to manage their liquidity and thus facilitate the growth of the economy. The key objectives of monetary policies are managing inflation and reducing unemployment. Taking inflation and unemployment under control is important for influencing the levels of real GDP of a country. To answer the question of what tools the Fed can use to increase the money supply, it is important to give a definition of money supply and factors that influence it. The money supply is defined as money that is available in the economy for use. Three factors that impact the money supply are banks, the Federal Reserve, and the public that deposits money (“How the Federal Reserve increases the money supply,” 2013).

  1. As the first option for increasing the money supply in the economy, the Fed can buy bonds. For instance, if one is to sell a government a treasury bond that has been purchased previously, money is received in return. Subsequently, the amount of money available for use increases. This means that when the Fed buys bonds, the supply of money increases.
  2. The second option is decreasing bank’s reserve requirements, which encourage banks to withhold specific amounts of unusable money for each dollar in customers’ deposits. For instance, if the reserve requirement for each dollar is 50%, the Fed can decrease it to 25% and thus increase the amount of “created” money.
  3. The third option is decreasing the discount rate to increase the amount of money a bank has to lend to customers and thus extend the money supply by making it easier to borrow money.

Regarding the negative implications of these policies, it is important to remember that the Fed does not directly control the number of money banks can lend and that the amount of money that banks control is directly influenced by the changes in depositing behavior.

Recession Problems

Recession refers to a significant economic decline of a country; as a rule, it lasts more than several months. The decline is characterized by indicators such as income, employment/unemployment, real GDP, retail sales, and manufacturing. When discussing the scenario in which the problem is too little spending, it is crucial to mention that recessions are caused by the loss of consumer confidence. With the decline of confidence the demand for purchasing goods decreases. The loss of confidence makes both customers and businesses to stop making purchases and move into the mode of defense against economic pressure. As a result of the loss of confidence, the destructive “downward spiral” is created (Amadeo, 2017, para. 6). The economy begins witnessing increased unemployment and layoffs, contributing to the slowdown in the volumes of retail sales. To address the slowdown in sales volumes, manufacturers start decreasing the number of orders and thus increasing layoffs (Amadeo, 2017).

On the other hand, when discussing the scenario in which the problem of recession is too little money, it was most likely caused by the lack of investment in the economy. While recessions can provide opportunities to buy assets at lower prices, such a fall in prices makes it impossible to support the economy. The odds are high that investors’ portfolios will fall further after the investment during the recession is made (Kennon, 2016). Since no investment or investment at low prices means less money for the economy, the problem of too little money during a recession is linked to the procedures associated with investments.

References

Amadeo, K. (2017). 11 causes of economic recession. Web.

Caldwell, M. (2017). What is the difference between credit card and a debit card? Web.

How the Federal Reserve increases money supply. (2013). Web.

Kennon, J. (2016). Better or worse to start investing in a recession? Web.

Merriam-Webster. (2017). Money. Web.

Open market operations – OMO. (n.d.). Web.