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Money Supply, Money Demand & Banking System (MaroEconomics)

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1 Drop of Water that falls in a Lake has no identity, But if it falls on a Lotus it shines like a Diamond. So chose the best place where You can Shine....... 2 Macro Economics Lecture No. 6 Banking System Zain Ul Abideen BBA-M1, M2, E1 (4th) 3 Concepts • Money is a tool that greatly simplifies market transactions. OR Anything generally accepted as a medium of exchange. • Money has three functions: Store of value, unit of account and medium of exchange. • Cash is obviously money because it fills all three purposes. • Checking accounts perform the same market functions as cash. Debit cards act much like a check, so they are money. • Online payment systems and credit cards do not. They can be a medium of exchange but do not fulfill the other purposes. • The essence of money is not its physical form, but its ability to purchase goods and services. 4 • Most money is in the form of electronic data. Composition of the Money Supply • M1: cash and transactions accounts – Transactions accounts include checking accounts and travelers checks. – Money supply (M1): currency held by the public, plus balances in transactions accounts. • M2: M1 plus savings accounts, etc. – Savings account balances and money market mutual funds are almost as good a substitute for cash as transactions accounts. – Money supply (M2): M1 plus balances in most savings accounts and money market mutual funds. – M2 must be turned into M1 before it can be used to purchase goods ...
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