1.Read text 21 using your dictionary to help with new words. Think of the suitable title.
Text 21
Everything that functions as a medium of exchange, a measure of value and a store of value is money. Maintaining the purchasing power of money depends largely on the government’s effectiveness in managing the money supply. The Federal Reserve System recognizes three “official” definitions of the money supply. M1 - the money supply is composed of two items:
1 Currency, that is, coins and paper money in the hands of the nonbank public.
2 All checkable deposits, meaning deposits in commercial banks and “thrift” or savings institutions on which checks can be drawn.
Coins and paper money are debts of government and governmental agencies. Checking accounts represent debts of the commercial bank or savings institution.
The safety and convenience of using checks have made checking accounts the most important form of money in many countries of the world. In dollar volume, for example, about 90 percent of all transactions are carried out by checks.
A check must be endorsed (signed on the reverse side) by the person cashing it; the drawer of the check subsequently receives the canceled check as an endorsed receipt attesting to the fulfillment of the obligation. Similarly, because of the writing of a check requires endorsement by the drawer, the theft or loss of your checkbook is not nearly as calamitous as losing an identical amount of currency. Furthermore, it is more convenient to write a check than to transport and count out a large sum of currency. People can convert checkable deposits immediately into paper and coins on demand; checks drawn on these deposits are thus the equivalent of currency.
There are some institutions offering checkable deposits:
1) Commercial banks – are the mainstays of the system. They accept the deposits of households and businesses and use these financial resources to make available a wide variety of loans. Commercial bank loans provide short-term working capital to businesses and farmers, finance consumer purchases of automobiles and other durables.
2) Thrift institutions – are savings and loan associations (S&Ls), mutual savings banks and credit unions.
Savings and loan associations and mutual savings banks marshal the savings of households and businesses which are then used to finance housing mortgages.
Credit unions accept the deposits of “members” – usually a group of individuals who work for the same company - and lend these funds to finance installment purchases. The checkable deposits are known by various names – demand deposits, NOW (negotiable order of withdrawal) accounts, ATS (automatic transfer service) accounts, and share draft accounts.
Near-Monies: M2 and M3
Near-monies are certain highly liquid financial assets such as noncheckable savings accounts, time deposits, and short-term government securities. Although they do not directly function as a medium of exchange, they can be readily and without risk of financial loss converted into currency or checkable deposits. Thus, on demand you may withdraw currency from a noncheckable savings account at a commercial bank or thrift institution. Or, you may request that funds be transferred from a noncheckable savings account to a checkable account.
You can withdraw funds quickly from a money market deposit account (MMDA).These are interest-bearing accounts offered by banks and thrifts, which pool individual deposits to buy a variety of short-term securities. MMDAs have minimum balance requirements and limit how often money can be withdrawn.
As the term implies, time deposits only become available to a depositor at maturity. For example, a 90-day or 6-month time deposit is only available without penalty when the designated period expires. Although time deposits are somewhat less liquid than noncheckable savings accounts, they can be taken as currency or shifted into checkable accounts when they mature.
Or, through a telephone call, you can redeem shares in a money market mutual fund (MMMF) offered through a financial investment company. These companies use the combined funds of individual shareholders to buy short-term credit instruments such as certificates of deposit and U.S. government securities.
M2 –the monetary authorities offer a second and broader definition of money:
M1 + noncheckable savings
deposits + MMDAs + small
Money, M2= (less than $100,000) time deposits
+ MMMFs
In other words, M2includes (1) the medium of exchange items (currency and checkable deposits) comprising M1 plus (2) other items such as noncheckable savings deposits, money market deposit accounts, small time deposits, and individual money market mutual fund balances. These other items can be quickly and without loss converted into currency and checkable deposits.
Money,M3 consists of M2 plus large time deposits (more than $100,000) time deposits.
