Uses_of_Money

Discussion Questions Ardmond Pree ECO212 June 20, 2011 David E. Sella-Villa Discussion Questions What are the uses of money' * Money is used for the purchase of goods, services and satisfaction of debt. Anything used as “money” should fulfill four functions: serve as a medium of exchange, give a unit of account, must have capability to be saved or increased in value and finally, be able to serve as a standard of deferred payment. * Banks create money by accepting deposits and making loans. Those loans then become assets and turn into money. * Monetary policy is conducted independently in the United States. The board of governors, a seven-member panel appointed by the President of the United States to non-renewable 14-year terms. The intended effect is not always achieved however. The intended effect of monetary policy is price stability, high employment, financial market stability and economic growth. Of all the intended effects, none are really being upheld. Unemployment and economic growth are two particular areas of concern. * The difference between contractionary and expansionary monetary policy is that contractionary monetary policy helps stabilize prices. This is done by decreasing the money supply and increasing rates. Expansionary monetary policy helps increase employment by increasing money supply and decreasing interest rates. * The pros of using expansionary policy tools under recession, depression and robust economic growth are as follows: * When contradictionary monetary policy is used, it adversely affects the economy. In most cases, the policy is contributing to the problem itself. This policy tool is usually implemented when inflation is out of control and the money supply needs controlling. * When expansionary monetary policy is used, it is in fact acting as its root word (expand) suggests. This is used to stimulate the economy, especially during times of financial crisis. This is primarily done by lowering interest rates and generating more money. However, if this policy is used during a period of inflation than this can in fact aid inflation in increasing. * Expansionary Monetary Policy is more appropriate today due to the fact that the current state of the US economy is at best shaky. Although the US has AAA credit, it has a ton of debt. Additionally, the US has nearly reached its debt ceiling, so the economy needs to be stimulated to generate more money. * The open market operation tool of monetary policy is the government buying and selling securities. Once securities are purchased by the fed, cash replaces those securities primarily in investor accounts, which translates to excess reserves for banks equating to more funds being available for lending and decreasing interest rates. This is most often used during recessions to help it recover and swing the business cycle. The selling of securities by the fed have the opposite effect by reducing cash and funds available for lending while increasing interest rates. When the economy is in higher inflation, funds are taken from the market and less money is available to spend. When less money is available to spend, overstocking will occur and prices will come down. * These policies affect the firm or industry in which I work (Real Estate) by lowering interest rates as a purchaser of securities. In this instance, it is good for my profession because potential home owners are more eager to get approved for a mortgage. Lower interest rates make financing anything, especially a home more appealing. This is what realtors call a “buyers market.” On the other hand, when the fed sells securities, this act reduces cash funds available for lending and increases interest rates. It becomes much more difficult to secure a home loan, especially when factors like credit come into play. This changes the entire spectrum of the home buying process. Buyers need a higher credit score to qualify. In addition, there may be further restrictions in the approval process. Long gone are the days of stated income loans and interest only adjustable rate mortgages which were a huge contributing factor to the housing market collapse. * Fixed-rate mortgages protect borrowers from increases on monthly mortgage payments in the event the market goes bust. Moreover, fixed-rate mortgages are easy to understand, comprehend, and nearly identical amongst lenders. The major disadvantage of fixed-rate mortgages is qualifying criteria. Qualifying for a fixed-rate loan is more difficult because the payments are less affordable. Furthermore, a fixed rate mortgage is better for the buyer because he knows the rate will never be better. * ARMs are considered attractive because they may offer low initial payments and enable qualified borrowers to obtain a larger loan. The main disadvantage of an ARM is the fluctuation in interest rate. There are so many ways to push an ARM. In other words, adjustable rate mortgages can often be problematic as the monthly payments may change frequently over the life of the loan. The disadvantage increases when the interest rate rises. It is very common for an ARM to start at a fixed rate and then convert to an adjustable rate after a few years. * One may be a good candidate for an ARM loan if he were able to afford higher mortgage payments should rates go up, if you are confident that rates will remain stable or decline in the future, or if you plan on staying in your home less than seven years. * Overall, I would recommend fixed-rate mortgages to homebuyers. I say this because there is less risk, especially during difficult energy