The Future Value of Money - Essay Example

Money is a medium that enables people to forgo the use of goods and services 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 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 below. 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 to 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 good which is ruled by the maxim of supply and demand. Money is 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 an increase in the supply of money, demand for money reduces, supply of goods decreases or when the demand for goods increases (Moffatt p.3).2.

Suppose the economy is experiencing recession and high unemployment. What would be the mainstream interpretation of how an easy money policy would address this problem? When an economy is under recession and there is a high rate of unemployment the Fed issues policies to maintain interest rates at a low level by purchasing securities. As a result, the price of securities rises and reduces their yields. This action of the Fed increases the number 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 increase in the amount of money reduces interest rates. The rapid growth rate of money will induce spending due to the impact of easy money policy from the government since there are higher cash balances. One person’s spending is another person’s income. The increase in income will increase liquidity and this creates a demand for loans. This will reverse the downward trend on interest rates in a year or two and gain the normal interest rate levels (Friedman & Bordo 2005 p.100) and the recession is overcome.

The ‘easy money policy’ utilizes all major tools to increase business and aggregate demand. The Fed uses an easy money policy to reduce reserve needs to permit loans to offer more credit to firms and individuals. The Fed operates in the open market by buying government securities worth billions of dollars. This pumps money to the economy that is under recession. The Fed reduces the discount rates that encourage depository institutions and commercial banks to lower the interest rates. Under the easy money policy, the government increases spending and allows tax cuts on personal income tax followed by cuts in corporate income tax.

The higher government spending and tax policies boost (OConnor & Faille 2000 p.170) aggregate demand in the economy and offer businesses a spur to increase production. The rise in GDP reduces the rate of unemployment. The economy is thus fine-tuned to promote stability (OConnor & Faille 2000 p.171).