Study of Money
1. Considering the definition of money, explain if credit is money or not.
Money is any good that is widely used and accepted in transactions involving the transfer of goods and services from one person to another. Money is a financial asset that one may spend. Keeping with this definition, the money supply includes financial assets like currency and deposits. In contrast to this definition, credit card debts are liabilities. Every time you use your credit card, then this creates a new loan from the company that issued you the card. Also the item that you put on the card is costing you a higher price unless you pay it off with 30 days. The line of credit is not considered a financial asset but only a way for you to borrow in order for you to finance a purchase.
2. Explain how the Fed can increase or decrease the interest rates using the Open Market Operations.
The Federal Government increases and decreases the supply of money by using the Open Market Operations. In using this system, the Fed will increase the supply of money by buying government securities using money that was not available in circulation before they made their purchase. When you have an increase of supply and everything else remain constant, price normally falls. The opposite happens when the fed increase interest rates and the open market sells government securities thereby taking the money they earn on the proceeds of those sales out of circulation. This also reduces the money supply in the economy and price usually rises. The fed tell us that when they increase or decrease the supply of money they are doing it to try to influence the Fed Funds Rate. It also influences the interest rate in which charge to each other for overnight loans. In a nutshell, when the fed lower or raises the interest rate, what is actually happening to all of us is they have increased or decreased the supply of money in