Economics Reflection, Essay Example

Chapter 14 begins by describing how money came to be the primary mode for exchanging goods and services. This chapter is really interesting in the sense that it specifically describes the features that make currency an effective tool to exchange goods and services such as high degree of acceptability, storage of value, and ability to retain purchasing power over time. This helps me understand why the barter system had serious limitations and eventually failed because not everyone has same needs and wants and not everything is capable of maintaining value over time. Some of the properties described for ideal currency help explain why U.S. dollar is one of the most desirable currencies in the world. The chapter also helps me understand how value of money declines over time due to inflation which is why governments try hard to keep inflation under control. This explains why people demand interest earning on their deposits in the bank and interest rates are higher for the long term as compared to the short term due to greater uncertainty. The chapter also introduces us to the Fed which plays an important role in regulating the supply of money in the economy. I also understood the concept of moral hazard which has been quite prevalent in the banking sector and has resulted in reckless behavior by some of the biggest banks and corporations. It seems that deregulation of the financial sector is responsible for moral hazard to some extent.

Chapter 15 introduces us to the concept of money supply and the various ways it is computed such as M1 and M2. Before taking this chapter, I thought money supply always refers to currency but this chapter has taught me that money supply also includes other liquid assets such as checks and bank checking accounts etc. The chapter has also taught me that Fed takes some steps to ensure the liquidity of the financial system by requiring banks to hold a particular proportion of their deposits as reserve which cannot be loaned out even though it imposes opportunity costs on the banks and other deposit institutions. Similarly, we learn that banks are essential to the functioning of the economy by acting as intermediaries between depositors and borrowers. The chapter also teaches us how Fed cannot only increase money supply but also decrease it by borrowing bonds. The chapter also touches up the effects of technology on the banking sector such as the rise if virtual banks which can be accessed anytime by the clients and these banks also benefit from lower startup costs and operating fees. The last topic addressed by the chapter are the monetary tools utilized by the Fed to influence quantity of money in the system such as open-market operations, discount rate, and required reserve ratio.

Chapter 16 starts with the factors that influence the demand for money such as interest rates, convenience (cash is being increasingly replaced by debit cards), and consumers’ lifestyles. Similarly, the state of the economy and inflation level also have direct impact on the demand for money. We also learn that the demand for money has negative relationship with the interest rate which makes sense because lower interest rates result in lower opportunity cost. This explains why investors move to countries with higher interest rates in search of higher returns. Similarly, supply of money is usually determined by Fed’s actions. This chapter has been particularly helpful in understanding Fed’s actions during the recent financial crisis. Fed has kept interest rates lower maybe to stimulate consumption activities after the recent financial crisis but it has also been careful not to overheat the economy which could lead to high rate of inflation.