Eco dq Essay Example | Topics and Well Written Essays - 500 words

Eco dq - Essay Example Money is a medium that enables people to forgo the use of goods and service that are less required to them and purchases which are most required. ii. People sell their service (work) to earn money now and to buy goods and services at a later time. Money is essential because it has a value in future and therefore people work to acquire money. The economic system of money functions on the basis of mutual aspects of belief (Moffatt p.2). iii. There are chances when the belief in money is lost or the future value of money is assumed to be low. This happens when the currency is impacted by inflation and people have a tendency to spend their money quickly. But profitable deals are not usually signed during inflation due to the fear of future value of money when it will be actually paid. Inflation can cause various inefficiencies in the economy where shop owners have to change the price of goods frequently and customers have carry loads of money to purchase just a loaf of bread. When people lose faith in money, economic activities are likely to halt. Like any other good, money is also a good which is ruled by the maxim of supply and demand. Money is a good, the value of which is determined by the demand and supply. Money tends to possess less value when there is inflation (when there is an increase in the price of goods) that occurs due to increase in supply of money, demand for money reduces, supply of goods decreases or when the demand for goods increases (Moffatt p.3). When an economy is under recession and there is high rate of unemployment the Fed issues policies to maintain interest rates at low level by purchasing securities. As a result, the price of securities rises and reduces their yields. This action of the Fed increases the amount of reserves with banks and increases the amount of bank credit that ultimately increases the total amount of money in the economy. This is the reason why central banks believe that the