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Functions of Money& management.doc
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Functions of Money

Money is often defined in terms of the three functions or services that it provides. Money serves as a medium of exchange, as a store of value, and as a unit of account.

Medium of exchange. Money's most important function is as a medium of exchange to facilitate transactions. Without money, all transactions would have to be conducted by barter, which involves direct exchange of one good or service for another. The difficulty with a barter system is that in order to obtain a particular good or service from a supplier, one has to possess a good or service of equal value, which the supplier also desires. In other words, in a barter system, exchange can take place only if there is a double coincidence of wants between two transacting parties. The likelihood of a double coincidence of wants, however, is small and makes the exchange of goods and services rather difficult. Money effectively eliminates the double coincidence of wants problem by serving as a medium of exchange that is accepted in all transactions, by all parties, regardless of whether they desire each others' goods and services.

Store of value. In order to be a medium of exchange, money must hold its value over time; that is, it must be a store of value. If money could not be stored for some period of time and still remain valuable in exchange, it would not solve the double coincidence of wants problem and therefore would not be adopted as a medium of exchange. As a store of value, money is not unique; many other stores of value exist, such as land, works of art, and even baseball cards and stamps. Money may not even be the best store of value because it depreciates with inflation. However, money is more liquid than most other stores of value because as a medium of exchange, it is readily accepted everywhere. Furthermore, money is an easily transported store of value that is available in a number of convenient denominations.

Unit of account. Money also functions as a unit of account, providing a common measure of the value of goods and services being exchanged. Knowing the value or price of a good, in terms of money, enables both the supplier and the purchaser of the good to make decisions about how much of the good to supply and how much of the good to purchase.

Monetary Policy

Monetary policy is conducted by a nation's central bank. In the U.S., monetary policy is carried out by the Fed. The Fed has three main instruments that it uses to conduct monetary policy: open market operations, changes in reserve requirements, and changes in the discount rate. Recall from the earlier discussion of money and banking that open market operations involve Fed purchases and sales of U.S. government bonds. When the Fed purchases government bonds, it increases the reserves of the banking sector, and by the multiple deposit expansion process, the supply of money increases. When the Fed sells some of its stock of U.S. government bonds, the end result is a decrease in the supply of money. If the Fed increases bank reserve requirements, the banking sector's excess reserves are reduced, leading to a reduction in the supply of money; a decrease in reserve requirements induces an increase in the supply of money.

The discount rate is the interest rate the Fed charges banks that need to borrow reserves in order to meet reserve requirements. From time to time, unanticipated withdrawals leave banks with insufficient reserves. Banks can make up for deficiencies in their required reserves by borrowing from the Fed at the discount rate. If the Fed sets the discount rate high relative to market interest rates, it becomes more costly for banks to fall below reserve requirements. Accordingly, banks will hold more excess reserves, which tends to reduce the multiple expansion of deposits and the supply of money. Similarly, when the discount rate is low relative to market interest rates, banks tend to hold fewer excess reserves, allowing for greater deposit expansion and an increase in the supply of money.

Expansionary and contractionary monetary policy. The Fed is engaging in expansionary monetary policy when it uses any of its instruments of monetary policy in such a way as to cause an increase in the supply of money. The Fed is said to engage in contractionary monetary policy when it uses its instruments to effect a reduction in the supply of money. Classical view of monetary policy. The classical economists' view of monetary policy is based on the quantity theory of money. According to this theory, an increase (decrease) in the quantity of money leads to a proportional increase (decrease) in the price level. The quantity theory of money is usually discussed in terms of the equation of exchange, which is given by the expression

In this expression, P denotes the price level, and Y denotes the level of current real GDP. Hence, PY represents current nominal GDP; M denotes the supply of money over which the Fed has some control; and V denotes the velocity of circulation, which is the average number of times a dollar is spent on final goods and services over the course of a year. The equation of exchange is an identity which states that the current market value of all final goods and services—nominal GDP—must equal the supply of money multiplied by the average number of times a dollar is used in transactions in a given year. The quantity theory of money requires two assumptions, which transform the equation of exchange from an identity to a theory of money and monetary policy.

Recall that the classical economists believe that the economy is always at or near the natural level of real GDP. Accordingly, classical economists assume that Y in the equation of exchange is fixed, at least in the short-run. Furthermore, classical economists argue that the velocity of circulation of money tends to remain constant so that V can also be regarded as fixed. Assuming that both Y and V are fixed, it follows that if the Fed were to engage in expansionary (or contractionary) monetary policy, leading to an increase (or decrease) in M, the only effect would be to increase (or decrease) the price level, P, in direct proportion to the change in M. In other words, expansionary monetary policy can only lead to inflation, and contractionary monetary policy can only lead to deflation of the price level.

Keynesian view of monetary policy. Keynesians do not believe in the direct link between the supply of money and the price level that emerges from the classical quantity theory of money. They reject the notion that the economy is always at or near the natural level of real GDP so that Y in the equation of exchange can be regarded as fixed. They also reject the proposition that the velocity of circulation of money is constant and can cite evidence to support their case.

Keynesians do believe in an indirect link between the money supply and real GDP. They believe that expansionary monetary policy increases the supply of loanable funds available through the banking system, causing interest rates to fall. With lower interest rates, aggregate expenditures on investment and interest-sensitive consumption goods usually increase, causing real GDP to rise. Hence, monetary policy can affect real GDP indirectly.

Keynesians, however, remain skeptical about the effectiveness of monetary policy. They point out that expansionary monetary policies that increase the reserves of the banking system need not lead to a multiple expansion of the money supply because banks can simply refuse to lend out their excess reserves. Furthermore, the lower interest rates that result from an expansionary monetary policy need not induce an increase in aggregate investment and consumption expenditures because firms' and households' demands for investment and consumption goods may not be sensitive to the lower interest rates. For these reasons, Keynesians tend to place less emphasis on the effectiveness of monetary policy and more emphasis on the effectiveness of fiscal policy, which they regard as having a more direct effect on real GDP.

Monetarist view of monetary policy. Since the 1950s, a new view of monetary policy, called monetarism, has emerged that disputes the Keynesian view that monetary policy is relatively ineffective. Adherents of monetarism, called monetarists, argue that the demand for money is stable and is not very sensitive to changes in the rate of interest. Hence, expansionary monetary policies only serve to create a surplus of money that households will quickly spend, thereby increasing aggregate demand. Unlike classical economists, monetarists acknowledge that the economy may not always be operating at the full employment level of real GDP. Thus, in the short-run, monetarists argue that expansionary monetary policies may increase the level of real GDP by increasing aggregate demand. However, in the long-run, when the economy is operating at the full employment level, monetarists argue that the classical quantity theory remains a good approximation of the link between the supply of money, the price level, and the real GDP—that is, in the long-run, expansionary monetary policies only lead to inflation and do not affect the level of real GDP.

Monetarists are particularly concerned with the potential for abuse of monetary policy and destabilization of the price level. They often cite the contractionary monetary policies of the Fed during the Great Depression, policies that they blame for the tremendous deflation of that period. Monetarists believe that persistent inflations (or deflations) are purely monetary phenomena brought about by persistent expansionary (or contractionary) monetary policies. As a means of combating persistent periods of inflation or deflation, monetarists argue in favor of a fixed money supply rule. They believe that the Fed should conduct monetary policy so as to keep the growth rate of the money supply fixed at a rate that is equal to the real growth rate of the economy over time. Thus, monetarists believe that monetary policy should serve to accommodate increases in real GDP without causing either inflation or deflation.

The nature of management

Management and Organizations

In today's tough and uncertain economy, a company needs strong managers to lead its staff toward accomplishing business goals. But managers are more than just leaders — they're problem solvers, cheerleaders, and planners as well. And managers don't come in one-size-fits-all shapes or forms. Managers fulfill many roles and have many different responsibilities at each level of management within an organization.

Organizations abound in today's society. Groups of individuals constantly join forces to accomplish common goals. Sometimes the goals of these organizations are for profit, such as franchise restaurant chains or clothing retailers. Other times, the goals are more altruistic, such as nonprofit churches or public schools. But no matter what their aims, all these organizations share two things in common: They're made up of people, and certain individuals are in charge of these people.

Enter managers. Managers appear in every organization — at least in organizations that want to succeed. These individuals have the sometimes-unenviable task of making decisions, solving difficult problems, setting goals, planning strategies, and rallying individuals. And those are just a few of their responsibilities!

To be exact, managers administer and coordinate resources effectively and efficiently to achieve the goals of an organization. In essence, managers get the job done through other people.

The intricacies of management

No matter what type of organization they work in, managers are generally responsible for a group of individuals' performance. As leaders, managers must encourage this group to reach common business goals, such as bringing a new product to market in a timely fashion. To accomplish these goals, managers not only use their human resources, but they also take advantage of various material resources as well, such as technology.

Think of a team, for example. A manager may be in charge of a certain department whose task it is to develop a new product. The manager needs to coordinate the efforts of his department's team members, as well as give them the material tools they need to accomplish the job well. If the team fails, ultimately it is the manager who shoulders the responsibility.

Levels of management

Two leaders may serve as managers within the same company but have very different titles and purposes. Large organizations, in particular, may break down management into different levels because so many more people need to be managed. Typical management levels fall into the following categories:

Top level: Managers at this level ensure that major performance objectives are established and accomplished. Common job titles for top managers include chief executive officer (CEO), chief operating officer (COO), president, and vice president. These senior managers are considered executives, responsible for the performance of an organization as a whole or for one of its significant parts. When you think of a top-level manager, think of someone like Dave Thomas of the fast-food franchise Wendy's. Although John T. Schuessler was elected CEO in 2000, Dave Thomas was the founder and served as the chairman of the board. He was the well-known spokesperson for the chain, until his death in 2002.

Middle level: Middle managers report to top managers and are in charge of relatively large departments or divisions consisting of several smaller units. Examples of middle managers include clinic directors in hospitals; deans in universities; and division managers, plant managers, and branch sales managers in businesses. Middle managers develop and implement action plans consistent with company objectives, such as increasing market presence.

Low level: The initial management job that most people attain is typically a first-line management position, such as a team leader or supervisor — a person in charge of smaller work units composed of hands-on workers. Job titles for these first-line managers vary greatly, but include such designations as department head, group leader, and unit leader. First-line managers ensure that their work teams or units meet performance objectives, such as producing a set number of items at a given quality, that are consistent with the plans of middle and top management.

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