Definitions in Economics and Finance

1) General

What is the money supply?

The money supply is the total means of payment in circulation at any given time in an economy owned by non-financial agents (households, rest of the world, state companies.)

What is a monetary aggregate?

A monetary aggregate is a currency category and liquid assets. Aggregates classify, measure and are used to administer the money supply.

What is liquidity?

Liquidity is the property of a financial asset that can be easily converted into a means of payment.

What are the three monetary aggregates?

All three monetary aggregates (money supply are the three) are M1, M2 and M3. They are classified according to the degree of liquidity, ie in M1, the most liquid assets are classified.

M1: it is the narrow conception of money. It is the money supply in the strict sense, it is the coins, the banknotes, the current accounts (these are liquid financial assets), that is to say all the means of payment.

M2: M1 + quasi-money (savings passbooks, savings accounts housing Codevi and term deposits of less than two years)

M3: M2 + mutual funds (SICAV and FCP) or M1 + + quasi money market funds.

The financial assets concerned by UCITS can be converted into a means of payment but there is a risk of loss of money linked to transaction costs and variations in the prices of transferable securities.

* UCITS: undertakings for collective investment in transferable securities
* Sicav: SICAV
* Fund: Mutual Funds

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What quasi-money?

Quasi-money is not a means of payment but is easily converted into a means of payment without the risk of capital loss

What is an aggregate investment?

An investment of this aggregate is an aggregate measure of savings. Warning: It is different from a monetary aggregate. Examples are the ELP actions.

What do we aggregate seeks to control through monetary policy?

The aggregate that one seeks to control through monetary policy is M3 because it is a broad conception of money. By controlling M3, we also control and M1 M2.
The currency in France is equal to 1000 million. In 2001 the mass of notes decreased but that relating to bank money and mutual funds has increased.

What is the component of the money supply M3 the most important?

The main component of the money supply is M3 bank money, then it is quasi-money and mutual funds.

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The money supply consists mainly of bank money and quasi-money. However, these currencies are created by banks.

Interest in money creation is thus interested in the role of banks in this activity.

Today, banks are called MFI (monetary financial institutions).

Interest in money creation is to focus on the role of MFIs.

2) The credits are deposits

MFIs have several ways to create money. When a bank makes an advance to a client, it is not money, it creates it.

What is a credit?

A loan is an amount lent. Money is created through credit

What is a claim?

A receivable is an acknowledgment of debt that the bank holds for example with regard to an indebted customer.

What assets?

That's all the bank has, owns. In this case, they are debts.

What is the liability?

The passive is formed by customer deposits and thus that the bank needs to customers.

What money creation?

Money creation is the increase in the money supply. It is registered in the bank's liabilities. Money on the customer's current account to the bank's liability is created in the money because the bank, the bank had not before, it has created. The money that is on the merchant's account does not match an advance deposit. The money comes from nothing, it really created: it is a creation ex nihilo.

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This stems from the money creation power of the MFI.

This currency is the currency of the bank because it has the power to create its own currency. With this credit transaction, the economy sees its money supply increase.

When the merchant repays the loan, the currency held by that agent disappears from the money supply -for the currency that the bank is not recognized in the monétaire- mass and the quantity of money (monetary base) owned by the bank increases. Since the currency held by the bank is not for the money supply, it decreases.

What is the destruction of money?

Currency destruction is when the money held by a non-financial agent becomes the property of the bank and therefore of a financial agent, during the repayment of a debt.

What is the property of the money created?

The ownership of the money created is that it is temporary. Money supply increases provided that it creates more money that is destroyed. Sometimes it creates money that is final (eg. Converting dollars to euros)

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