RIRIS

Teknik Industri 2013

MONETARY SYSTEM
The Meaning of Money
1. Money is medium of exchange
A barter system requires a double coincidence of wants for trade to take place. That
is, to effect a trade, you have to find someone who has what you want and that person
must also want what you have. Where the range of goods traded is small, as it is in
relatively unsophisticated economies, it is not difficult to find someone to trade with
and barter is often used. In a complex society with many goods, barter exchanges
involve an intolerable amount of effort. Imagine trying to find people who offer for
sale all the things you buy in a typical trip to the supermarket and who are willing to
accept goods that you have to offer in exchange for their goods. Some agreed-to
medium of exchange (or means of payment) neatly eliminates the double-oincidence-
of-wants problem. Under a monetary system, money is exchanged for goods or
services when people buy things; goods or services are exchanged for money when
people sell things. No one ever has to trade goods for other goods directly. Money is a
lubricant in the functioning of a market economy.
medium of exchange, or means of payment What sellers generally accept
and buyers generally use to pay for goods and services.

2. A Store of Value
Economists have identified other roles for money aside from its primary function as a
medium of exchange. Money also serves as a store of valuean asset that can be used
to transport purchasing power from one time period to another. If you raise chickens
and at the end of the month sell them for more than you want to spend and consume
immediately, you may keep some of your earnings in the form of money until the time
you want to spend it. There are many other stores of value besides money. You could
have decided to hold your surplus earnings by buying such things as antique
paintings, baseball cards, or diamonds, which you could sell later when you want to
spend your earnings. Money has several advantages over these other stores of value.
First, it comes in convenient denominations and is easily portable. You do not have
to worry about making change for a Renoir painting to buy a gallon of gasoline.
Second, because money is also a means of payment, it is easily exchanged for
goods at all times. (A Renoir is not easily exchanged for other goods.) These two
factors compose the liquidity property of money. Money is easily spent, flowing out of
your hands like liquid. Renoirs and ancient Aztec statues are neither convenient nor
portable and are not readily accepted as a means of payment. The main disadvantage
of money as a store of value is that the value of money falls when the prices of goods
and services rise. If the price of potato chips rises from $1 per bag to $2 per bag, the
value of a dollar bill in terms of potato chips falls from one bag to half a bag. When
this
happens, it may be better to use potato chips (or antiques or real estate) as a store of
value.
store of value An asset that can be used to transport purchasing power
from one time period to another
liquidity property of money The property of money that makes it a good
medium of exchange as well as a store of value: It is portable and readily
accepted and thus easily exchanged for goods..

3. A Unit of Account Money also serves as a unit of accounta consistent way of
quoting prices. All prices are quoted in monetary units. A textbook is quoted as
costing $90, not 150 bananas or 5 DVDs, and a banana is quoted as costing 60 cents,
not 1.4 apples or 6 pages of a textbook. Obviously, a standard unit of account is
extremely useful when quoting prices. This function of money may have escaped
your noticewhat else would people quote prices in except money?
unit of account A standard unit that provides a consistent way of quoting
prices.

Comodity and Fiat Money
1. Comodity Money
Commodity monies are those items used as money that also have an intrinsic value in
some other use. For example, prisoners of war made purchases with cigarettes, quoted
prices in terms of cigarettes, and held their wealth in the form of accumulated
cigarettes. Of course, cigarettes could also be smokedthey had an alternative use
apart from serving as money. Gold represents another form of commodity money. For
hundreds of years gold could be used directly to buy things, but it also had other uses,
ranging from jewelry to dental fillings. Uang yang bentuknya komoditas.
commodity monies Items used as money that also have intrinsic value in
some other use

2. Fiat Money
Fiat money, sometimes called token money, is money that is intrinsically worthless.
The actual value of a 1-, 10-, or 50-dollar bill is basically zero; what other uses are
there for a small piece of paper with some green ink on it? The public accepts paper
money as a means of payment and a store of value because the governmenthas taken
steps to ensure that its money is accepted. The government declares its paper money
to be legal tender. That is, the government declares that its money must be accepted in
settlement of debts. It does this by fiat (hence fiat money).
fiat, or token, money Items designated as money that are intrinsically
worthless. legal tender Money that a government has required to be
accepted in settlement of debts.
legal tender Money that a government has required to be accepted in
settlement of debts.
Aside from declaring its currency legal tender, the government usually does one other
thing to ensure that paper money will be accepted: It promises the public that it will
not print paper money so fast that it loses its value. Expanding the supply of currency
so rapidly that it loses much of its value has been a problem throughout history and is
known as currency debasement. Debasement of the currency has been a special
problem of governments that lack the strength to take the politically unpopular
step of raising taxes. Printing money to be used on government expenditures of goods
and services can serve as a substitute for tax increases, and weak governments have
often relied on the printing press to finance their expenditures. A recent example is
Zimbabwe. In 2007, faced with a need to improve the public water system,
Zimbabwes president, Robert Mugabe, said Where money for projects cannot be
found, we will print it (reported in the Washington Post, July 29, 2007). In later
chapters we will see the way in which this strategy for funding public projects can
lead to serious inflation.
currency debasement The decrease in the value of money
that occurs when its supply is increased rapidly.

Functions of the Federal Reserve
Federal reserve regulates the quantity of money in the economy designed to oversee the
banking system.
The function of Fed Reserve are:
1. clearing interbank payments
Suppose you write a $100 check drawn on your bank, the First Bank of Fresno (FBF),
to pay for tulip bulbs from Crockett Importers of Miami, Florida. Because Crockett
Importers does not bank at FBF, but at Banco de Miami, how does your money get
from your bank to the bank in Florida? The Fed does it. Both FBF and Banco de
Miami have accounts at the Fed. When Crockett Importers receives your check and
deposits it at Banco de Miami, the bank submits the check to the Fed, asking it to
collect the funds from FBF. The Fed presents the check to FBF and is instructed to
debit FBFs account for the $100 and to credit the account of Banco de Miami.
Accounts at the Fed count as reserves, so FBF loses $100 in reserves, and Banco de
Miami gains $100 in reserves. The two banks effectively have traded ownerships of
their deposits at the Fed. The total volume of reserves has not changed, nor has the
money supply.
2. egulating the banking system
For example, the Fed has the authority to control mergers among banks, and it is
responsible for examining banks to ensure that they are financially sound and that they
conform to a host of government accounting regulations. As we saw earlier, the Fed
also sets reserve requirements for all financial institutions.
3. assisting banks in a difficult financial position (lender of last resort One of the
functions of the Fed: It provides funds to troubled banks that cannot find any other
sources of funds)

How the Federal Reserve Controls the Money Supply
1. The Required Reserve Ratio
If the Fed wants to restrict the supply of money, it can raise the required reserve ratio,
in which case banks will find that they have insufficient reserves and must therefore
reduce their deposits by calling in some of their loans. The result is a decrease in
the money supply.

2. The Discount Rate
The Fed can influence bank borrowing, and thus the money supply, through the
discount rate. The higher the discount rate, the higher the cost of borrowing and the
less borrowing banks will want to do. If the Fed wants to curtail the growth of the
money supply, for example, it will raise the discount rate and discourages banks from
borrowing from it, restricting the growth of reserves (and ultimately deposits).

3. Open Market Operations
An open market purchase of securities by the Fed results in an increase in reserves
and an increase in the supply of money by an amount equal to the money multiplier
times the change in reserves.
An open market sale of securities by the Fed results in a decrease in reserves and a
decrease in the supply of money by an amount equal to the money multiplier times
the change in reserves.
Salah satu car auntuk mengurangi uang adalah pemerintah menjual obligasi. Obligasi
adalh deposito ynag dikeluarkan oleh pemerintah


CLASIFICATION OF MONEY
KIND Example
M1 M1, or tovoo_tiovo ovc
Money that can be directly
used for transactions
Dollar bill,
Coin,
Demand deposit,
Other checkable
M2 cannot
be used for transactions
directly, but it is easy to
convert them into cash or to
transfer funds from
a savings account into a
checking account
Everything in M1,
Deposit,
Funds
M3 M2 + large time deposit Mutual funds