Introduction

What we are going to discuss in this assignment is about the monetary system. We have identified several objectives in this topic. First of all, it is important for us to know what are money and the functions of money. Money is a set of asset that can be uses to buy goods and services from other people. Money acts as a medium of exchange, a unit of account and a store of value. Money is the most liquid asset available. What is liquidity? Liquidity is the ease with which an asset can be converted into the economys medium of exchange. There are seven types of characteristics of money which are acceptability, durability, divisibility, portability, uniformity, stability of value and hard for individuals to produce themselves. The two forms of money are commodity money and fiat money. Next, we need to define the money supply. Money supply is the quantity of money available in the economy. Money supply divided into three sections which are M1, M2 and M3. Then, we need to know the outline and discuss the functions of central bank (Fed Reserve System is the central bank of US). In general, FED consists of the Board of Governors, the Federal Open Market Committee (FOMC), twelve regional Federal Reserve Banks, member banks and advisory committees. There are five major functions of central bank which are, they act as a bankers bank, banker for the government, controller of money supply, lender of last resort and to monitor and inspect the financial conditions of each member institutions. Bank Negara Malaysia is the central bank of Malaysia. This bank have seven functional areas which covered economics and monetary policies, investments and operations, regulations, payment systems, supervision, organizational development and communications. Furthermore, we need to define what open market operation (OMO) is. OMO is the purchase and sale of government securities or bonds in financial market and at the same time influence the size of bank deposits. In addition, the FED has three different tools to alter the supply of money in the market. These tools are the open market operation, reserve requirements, and discount rates.

The Definition of Money

Money is a token of item which acts as a medium of exchange that has both legal and social acceptance with regards to making payment for buying commodities or receiving services, as well as repayment of loans. In the past, money was generally considered to have four main functions, which are as a medium of exchange, a unit of account, a standard of deferred payment and a store of value. However, the modern economics now listed money functions as medium of exchange, unit of account and store of value.

The Function of Money

Medium of exchange When money is used to intermediate the exchange of goods and services, it is performing a function as a medium of exchange. Without money, all transaction 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. Thus, the use of money as the medium of exchange will thereby avoids the inefficiencies of a barter system.

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.

Store of value To act as a store of value, money must be able to be reliably saved, stored and retrieved and be predictably usable as medium of exchange when it is retrieved. The value of the money must also remain stable over time. However, as a store of value, money is not unique; many other stores of value exist, such as land, work of art, and even baseball cards and stamps. Money may not even be the best store of value as inflation will reduces the value of money, diminishes the
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ability of the money to function as a store of value. 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.

The kinds of Money

Money is an abstraction, idea or concept, token instances of which are the physical bills or coins which are carried and traded. Currently, most modern monetary systems are based on fiat money. However, for most of history, almost all money was commodity money, such as gold and silver coins.

Commodity money Many items have been used as commodity money such as naturally scarce precious metals, conch shells, barley, and beads, as well as many other things that are thought of as having intrinsic value which means the items would have value even if it were not used as money. Commodity money value comes from the commodity out of which it is made. The commodity itself constitutes the money, and the money is the commodity. Examples of commodities that have been used as medium of exchange include gold, silver, copper, rice and cigarette.

Fiat money Fiat money is money whose value is not derived from any intrinsic value or guarantee that it can be converted into a valuable commodity (such as gold). Instead, it has value only by government order. Usually the government declares the fiat currency to be legal lender, making it unlawful to not accept the fiat currency as a means of repayment for all debts, public and private. Fiat money, if physically represented in the form of currency (paper or coins) can be accidentally damaged or destroyed. However, fiat money has an advantage over commodity money, in that the same laws that created the money can also define rules for its replacement in case of damage or destruction. By contrast, commodity money which has been lost of destroyed cannot be recovered.

Money in the Economy

Money Supply In economics, money is a broad term that refers to any financial instrument that can fulfill the functions of money. These financial instruments together are collectively referred to as the money supply of an economy. Since the money supply consists of various financial instruments, the amount of money in an economy is measured by adding together these financial instruments creating a monetary aggregate. Modern monetary theory distinguishes among different types of monetary aggregates, using a categorization system that focuses on the liquidity of the financial instrument used as money.

Measure of Money
The money supply is the amount of financial instruments within a specific economy available for purchasing goods or services. The money supply is usually measured as three escalating categories M1, M2 and M3. The categories grow in size with M1 being currency (coins and bills) and checking account deposits. M2 is currency, checking account deposits and savings account deposits, and M3 is M2 plus time deposits. M1 includes only the most liquid financial instruments, and M3 relatively illiquid instruments.

M1 M1 is the narrowest definition of money supply and it consists of currency outside banks plus checkable deposits plus travelers checks. Currency help outside banks include coins and paper money. Checkable deposits are funds on which checks can be written while travelers checks are those that issued in specific denominations and are treated as cash. M2 M2 is the category that with a broader definition of money supply, it includes all of the componetns of M1 plus small-denominations time deposits plus saving deposits plus money market account plus other deposits. Time deposits are interest-earning deposits with a specific maturity, which are subject to penalty for early withdrawal. Saving deposits are also interestearning deposits but with no specific maturity or maximum value, but which may require advanced written notice of withdrawal. While money market accounts are accounts that take
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saving s and invest them in short-term financial instruments. They pay higher-than-savingsaccount interest and offer limited check-writting priviledges. M3 M3 is equals to M2 plus deposits with non-bank financial institution such as deposits of finance companies and post office savings.

The Federal Reserve System

The Federal Reserve System or the Fed is the central bank of the United States. The Fed is the only entity with the permission of US government to produce US paper currencies and circulate these currencies into the market. It was founded in 1913 to ensure a stable banking system in the United States and promote a strong economic growth in the nation. Also, the Fed was created with the purpose of influence and controls the flow of money in the economy. Basically, this system is consists of the Board of Governors, the Federal Open Market Committee (FOMC), twelve regional Federal Reserve Banks, member banks and advisory committees.

The Board of Governors The Board of Governors, sometimes called the Federal Reserve Board, represents the ultimate authority of the Federal Reserve System. In other words, the Board of Governors is the organization at the head of the Federal Reserve banking system in the United States. Located in Washington, D.C., the Board has seven members that are appointed to 14-year term by the President and confirmed by the Senate. Between the seven members of the board, the chairman is the most well-known and visible representative of the Fed. The chairman of the board is appointed by the president to a 4-year term. As the chairman act as one of the principal economic advisers to the President and Congress, thus the Board requires the chairman to make regular reports to Congress. The primary responsibility of the board is the formulation of monetary policy to promote a healthy and growing economy in America. Nevertheless, the Board spends most of the time in banking supervision. The supervisory responsibilities of the board extend to the Federal Reserve Banks, bank holding companies, and Federal Reserve System banks. In order to fulfill these responsibilities, the Board sets the reserve requirements that would decide the percentage of deposits that each member banks must hold as reserves. In addition, it also reviews and approves the discount rate, which is the interest rate that would be charged to member banks for Federal Reserve loans. Other than that, the Board has the regulatory responsibilities in supervises the activities of member banks such as bank mergers, acquisitions, operations of member banks in foreign countries and interest regulation on both time and savings deposits.
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Apart from that, the Board plays an important role in ensuring the smooth functioning and continued development of nations payment system. Likewise, the Board also plays a key role in the regulatory implementation of consumer credit and community federal laws such as the Truth in Lending Act, the Community Reinvestment Act, the Equal Credit Opportunity Act and the Truth in Savings Act.

The Federal Open Market Committee The Federal Open Market Committee or the FOMC is composed of seven members from the Board of Governors and five reserves bank presidents. The president of the Reserve Bank of New York serves continuously, whereas the presidents of the other reserve banks rotate on a yearly basis. The Federal Open Market Committee holds eight regularly scheduled meetings per year; means that the FOMC meets eight times per year to discuss about current economic and financial condition as well as to determine the appropriate stance of monetary policy. The most important function of the Federal Open Market Committee is to make key decision regarding the conduct of open market operations. Open market operations are the purchases and sales of government securities in the money of nation. Besides that, open market operations represent the bond markets that would affect the provision of reserves of financial institutions. On the other hand, the FOMC extend Open Market Operations to the international exchange market where foreign currencies are traded. In such a manner, each Federal Reserve Bank may not execute open market operations for their own benefit and these banks may also engage in open market transactions in foreign exchange under the review and regulation of the Federal Open Market Committee.

The Federal Reserve Banks The Federal Reserve System is constituted of twelve districts or service areas. Each district has an office in a major financial center and most of the banks have branch offices as well, for a total of 25 branches around the world. The twelve Federal Reserve Banks districts are headquartered in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

Furthermore, each of the twelve Federal Reserve Banks has its own president and board of directors since each is separately incorporated. A president for each bank is appointed to fiveyear terms by the board of director at each Federal Reserve Bank with the approval of the Federal Systems Board of Governors. As such, each branch office also has its own board of directors. In fact, many activities are subject to the authority of the twelve Federal Reserve Banks. Firstly, the board of each bank that establishes discount rate must get approval from the Board of Governors. Besides that, the banks act as fiscal agents for the United States Treasury and other government agencies as the banks will lend a hand in handle fiscal matter of the Government. Similarly, the banks also act as regional clearinghouses and collection agents for depository institutions by helping these institutions in collecting checks from others. Moreover, the Reserve Banks has the responsibility in clearing balances for depository institutions in accordance with the Monetary Control Act of 1980. Lastly, the Federal Reserve Banks also act as representatives of their districts to the Federal Reserve System by providing information concerning local business and financial conditions that are critical to the decision-making process of monetary policy. Additionally, the Reserve Banks also operate the two national electronic funds transfer systems, which are Fedwire and Automated Clearinghouse. These systems are useful in facilitate interbank and intergovernmental transfer of funds via electronic record-keeping so that the transactions between two parties would be more efficient and effective. Fedwire is used mainly for large transactions by the government, depository institutions, and large businesses, while the Automated Clearinghouse is used more frequently for ordinary wire transfers and electronic payments among businesses and individuals.

Member Banks Member banks represent the banks that are part of a central banking system. Generally, such banks have to follow the rules and regulations introduced by the central bank. In fact, most of the member banks are from the well-known commercial banks in the United States, including national and state-chartered banks. National banks are required to be members of the Federal Reserve System when these banks are being chartered by the Comptroller of the Currency. In contrast, State-chartered banks may become members if certain requirements that established by
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the Board of Governors are met. As a member of the Federal Reserve System, each institution is required to hold stock in its respective Federal Reserve Bank and is also under the supervision of the particular Reserve Banks. Among the nine member institutions, six of the members are being elected to the board of each Federal Reserve Bank and receive an annual dividend on the Reserve Bank stock. Before the year 1980, many state-chartered banks opted not to become members of the Federal Reserve System because of the relatively high reserve requirements imposed by the system. Conversely, non-member banks only had to meet the lower reserve requirements imposed by their state authorities. Hence, the Monetary Control Act of 1980 is established to impose uniform reserve requirements on the depository institutions. The act specifies that all depository institutions are subject to the reserve requirements of the Federal Reserve System. In addition to the rule of the Monetary Control Act of 1980, the act also expanded access to the Federal Reserve services with explicit fees which were previously restricted to member institutions.

Advisory Committees The Federal Reserve System uses advisory committees in execute its varied responsibilities and to facilitate the flow of operations and communication within the system. The Federal Advisory Council that consists of one member from each Reserve Banks is created by the Federal Reserve Act. The prominent bankers in the district among the members are selected by the board of directors at each Reserve Bank annually. Fundamentally, there are three types of advisory committees, which are the Federal Advisory Council, the Consumer Advisory Council and the Thrift Institutions Advisory Council that give advice to the Board of Governors directly. Firstly, the Federal Advisory Council is comprised of twelve representatives of the banking industry. It is accountable for consult with the Board on all the matters within its jurisdiction. As required by the Federal Reserve Act, the council ordinarily meets at least four times per year to make recommendations on business and financial issues relating to banking. These meetings always held in Washington, D.C, ordinarily on the first Friday of February, May, September, and December, even though sometimes the meetings are conduct on different time to suit the

convenience of either the council or the Board. Each year, one member from each Federal Reserve District is selected by the Board of Directors in each of the 12 Federal Districts. Next, the Consumer Advisory Council that established in 1976 is composed of 30 members. The councils function is to advise the Board on its responsibilities under the Consumer Credit Protection Act and on the matters in the field of consumer financial services. The council represents the interest of consumers, creditors, communities and the finance services industry. The members of the council are appointed by the Board of Governors to a three-year term. In addition, it meets three times a year in Washington, D.C, and the meetings are open to the public since the council is drawn from a diverse group of consumers and lenders. Lastly, the Thrift Institutions Advisory Council was founded in 1980 by the Board of Governors to provide information on the issues and concerns of thrift institutions. The twelve members within the council are consisting of representatives from savings bank, savings and loan associations, and credit unions. Unlike the Federal Advisory Council and the Consumer Advisory Council, it is not a statutory body, but it carry out a parallel function in providing firsthand advice from the representatives of institutions. The council meets three times a year with the Board in Washington, D.C.

Functions of the Federal Reserve System The Federal Reserve System has several functions to oversee the national banking system and control the quantity of money in the market. Firstly, it serves as a banker for banks as many transactions between banks are processed through the Federal Reserve System. For example, the Fed represents a clearing house for check in order to facilitate bank transactions in form of check. Also, the financial institutions are able to borrow money from the Federal Reserve, but only after the banks have tried to find credit elsewhere. In other words, the Fed is making short term loans to commercial banks as a way of providing temporarily liquidity to them. Besides that, the Federal Reserve System also acts as a banker for the government. That is, the Fed providing financial services to the US government by holding its fund in an account which it can make deposits and writes cheques against the account. For instance, the US government could regulate its tax system through a Federal Reserve checking account to process incoming and outgoing payments. Furthermore, when tax collections are inadequate to finance its
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expenditure, the government could actually borrow money from the Fed by selling securities to the bank. The other function of the Federal Reserve System is to be the controller of money supply, which is to say that the Fed play an important role in controlling the quantity of money available in the economy. One of the ways to affect the amount of money available to business and consumers is to implement monetary policy through the Federal Open Market Committee. In order to increase the money supply in the market, the Fed could buy government bonds from the public. On the contrary, if the Fed wishes to decrease the money supply in the economy, it could choose to sell government bonds to the public. Apart from that, the Federal Reserve System is function as lender of last resort to help those financially troubled banks who are short of cash and cannot borrow anywhere else. It means that if the banking system is short of liquidity, the Fed will always be prepared to lend it. Thus, from this function, we can notice that the Fed is play a significant role in ensuring stability of the US financial system and preventing serious financial crisis. Another function of the Federal Reserve System is to monitor and inspect the financial conditions of each member institutions so that they will follow laws intended to promote safe and sound practices such as Banking and Financial Institutions Act 1989. Other than monitoring each banks financial condition, the Fed also has the function of check clearing to facilitate bank transactions within the entire banking system. As a regional clearinghouse, each Federal Reserve Banks is required to exchange or clear checks deposited at one institution but written on another institution. By the way, the Fed also settles checks by moving funds from payer to payee institution.

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Central Bank of Malaysia (Bank Negara Malaysia)

The Central Bank of Malaysia was established on 26 January 1959. The central Bank of Malaysia is wholly owned by the government of Malaysia with a paid-up capital progressively increase, currently at RM100million. The ministry of finance will be informed with the report for the bank and the bank will keeps the minister of finance updated on the matters pertaining to monetary and financial sector policies. Roles and functions The major role of the bank is to conduct the monetary policy, which has seen generally low and stable inflation for decades and thereby, preserving the purchasing power of ringgit. Besides that, the bank is also act as the banker for issuing currency. Thus, it has the responsibility to issue currency and keep international reserves as well as safeguarding the value of the currency. Moreover, the bank is also responsible in keeping the stability and fostering a sound and progressive financial sector. Also, the bank is involved in the development of financial system infrastructure with major emphasis placed on building the nations efficient, secured payment systems and necessary institutions such as Securities Commission, Bursa Malaysia and so on. Therefore, the bank involvement in the economic sectors and segments of society lend a hand in supporting balanced economic growth. The bank also plays an important role of becoming a banker and adviser to the government, giving advice on macroeconomic policies and managing the public debt. It is also responsible in managing the countrys international reserves. The bank is supported by 37 departments in the Bank that covering seven functional areas. y y y y y y y Economics & Monetary Policy Investment and operations Regulation Payments systems Supervision Organizational development Communications
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Open Market Operation (OMO)

Definition of Open Market Operation The purchase and sale of government securities or bonds in financial market and at the same time influence the size of bank deposits. Monetary targets such as inflation, interest rates or exchange rates are used to guide the implementation of Open Market Operation. When the demand for base money which is cash (notes and coins only) held outside of the central bank and government increases, money supply is increases in order to maintain the short term interest rate. The central bank goes to the open market to buy financial asset such as the government bonds, foreign currency or gold. To pay for the purchase of financial assets, the central bank reserves in the form of new base money (for example newly printed cash) is transferred to the sellers bank, and the sellers account is credited. Eventually, the action increases the total amount of base money in the economy. On the other hand, if the central bank sells these financial assets in the open market, the amount of base money that the buyer's bank holds decreases as the money they hold is paid out to the central bank, hence, effectively destroying base money.

Examples, To increase the money supply (Open-market purchase) The Bank Negara Malaysia (BNM) buys bonds from the market (firms and households), and pays with cheques drawn against the BNM and payable to the households or firms who sold the bonds. Households and firms then deposit the cheques in their own banks. After that, banks present the cheques to BNM for payment. BNM then makes book entry, thus increasing the deposit of the banks at BNM. Since required reserve ratio has not changed, the increase deposits or reserves with BNM increases the excess reserves of the banks. Banks are likely to lend out the excess reserves as reserves typically earn very low or no interest. This leads to a rise in deposits money and an expansion of the money supply.

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Central Bank purchases government bonds. Central Bank (BNM)

Households or Firms.

Central Bank pays the amount through the households or firms respective banks. (Banks deposits increased)

Commercial Banks (Eg, CIMB Bank)

Diagram 1: The way Central Bank (BNM) increases money supply. To reduce the money supply (Open-market sale) BNM sells bonds to the market (firms and households), and individuals or firms who purchases government securities pay by writing cheques drawn against their own banks, make payable to BNM. The amount on the cheques shows how much the bank owes the BNM. The payment of this amount owed to the BNM is made by a book entry that reduces the banks deposits at BNM. As a result, cash reserves of the banks are reduced; so as the quantity of lending. Since banks cannot create credits easily, this leads to a decline of the money supply.

Central Bank sells government bonds. Central Bank (BNM)

Households or Firms

Pay to Central Bank the amount of cheques written by households or firms. (Banks deposit is reduced)

Write cheques to pay to Central Bank. Commercial Banks (Eg, CIMB Bank)

Diagram 2: The way Central Bank (BNM) reduces money supply.

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In Malaysia, Open Market Operation is not effective as the public holds very little government securities (less than 3%) because of low at rate of interest. The largest buyers of government securities would be the insurance companies.

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The Money Multiplier

Definitions

Under the fractional-reserve banking system, required reserve ratio is stipulated by the central bank in controlling the money supply of the economy. Meaning to say, a constant amount of the money deposited by households are kept as reserves from each and every single commercial bank in the nation. Money multiplier, the reciprocal of the particular ratio, on the other hand, employed in computing the maximum amount of money that could affordably be created in the particular money market. In several different sorts of ways the definition for money multiplier could be well explained and demonstrated.

To a certain extent, the money multiplier could be defined as the single measure or ratio of commercial bank money to central bank money, indicating that the monetary amount loaned out and subsequently created depends entirely on the quantity kept in the central bank reserve. In other words, such statistic measurement is according to the basis on which the observation concerning the quantities of various empirical measures of money supply is conducted.

Theoretically, it can be considered as the mathematical relationship between the money supply and the monetary base within the economy. In short, it is fully dependant on the legalized regulations implemented, and shows the increment in the amount of money generated by the banks when lending money out of the deposited quantity.

Based on the precise definition of this measure stated above, we could distinguish it into two different kinds of categories, namely empirical (observed) multiplier and legal (model) multiplier, relying on which the model of money creation is chosen. In the sense of statistics, there will be continuous fluctuations over time in the multiplier if observed reserve-deposit ratio or currencydeposit ratio were used to determine the expected impact it could have on the monetary quantity created in the economy. On the other hand, the multiplier which depends fully on the reserve ratio in the legal sense would remain constant, providing there is no any change in the laws within the specific period of time.

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Implications Implicitly, the money multiplier does have made an assumption that the central bank plays a relatively significant role in controlling the money supply by setting the required reserve ratio to determine the amount to be hold under the reserve system, and thus identifying the total volume of cash to be loaned out at the multiple of that particular ratio. To explain more exactly and accurately, monetary policy is considered having a tremendous effect on monetary policy.

From the model showing that the deposited amounts in commercial banks are almost equivalent to those expected to be generated from the ratio multiple, money multiplier could be confirmed as to run from the reserve to deposits. In other words, the central bank can easily control the scope of money supply of the economy by adjusting the level of excess reserves. Nevertheless, in truth, there is always an exception and everything is going to be another way round.

In the reality of current economy, banks are always affordable to lend as much quantity as demanded by the society, if and only if they have comparatively sufficient capital enabling them to conduct such a practice. Furthermore, they could have issued a certain enormous amount of money without giving it a second thought provided that the particular borrower is trustworthy enough, and a lucrative earning opportunity is to be offered upon the borrowing periods of time. To meet the reserve requirement, they would rather choose to borrow from the money market as compared to the central bank that charges on the loans issued.

Additionally, the central bank is undeniably not affordable in forcing the money supply to grow when the accumulation of excess reserves keep increasing continuously, especially during the economic crises. The increment in the deposits of central bank would only result in the growth of the excess reserves, rather than compel the commercial banks in lending out the money as loans.

Mechanism Now, lets see how this multiplier works in a money creation model under the fractional-reserve banking system. Assuming a required reserve ratio, r = 15%. A young man deposited d = RM 200 in First Bank. With a 15% requirement, the First Bank has d r = RM 30 reserve requirement. The remaining reserve or excess reserve requirement amount is as follow:
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E1 = d 1 - r E1 = 200 1 - 0.15 = RM170

The First Bank lends out this amount to the Second Bank. So, the Second Banks excess reserve is equivalent to: E2 = E1 (1 - r) E2 = 170 1 - 0.15 = RM144.50

Re-deposited E2 creates excess reserves in the Third Bank. Hence, the excess reserve of this bank would be as follow: E3 = E2 1 - r = E1 (1 - r)2 E3 = 144.50 1 - 0.15 = RM122.83

The total increase in the money supply D is D = E1 (1 + (1 - r)2 + + (1 - r)n +)

Lets multiply D by the term (1 r) and subtract this from D: D D (1 r) = E1(1 + 1 - r + (1 - r)2 ++ 1 - r)n + - E1( 1 - r +(1 - r)2 ++ 1 - r)n + D r = E1 D = E1 r D = E1 m D = 170 1 / 0.15 = RM1133.33

D = RM1133.33 is the increase in the money supply for the banking system as a whole.

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Feds Tools of Monetary Control

The Fed has 3 monetary tools to control the fiscal policy: Open market operation, reserve requirements and discount rates.

1.) Open market operation (OMO) Stated by Investopedia, OMO is the act of buying and selling of government securities, e.g. bonds, in the society to increase or decrease the amount of money in the banking system. OMO is the most flexible policy available for the Fed to increase or decrease the money supply. So basically, purchases of securities inject money into the banking system and stimulate growth while sales of securities do the opposite. Dictates by the Federalreserve.gov, The decision to buy or sell the government securities are solely based on the ordinances set by the Federal Open Market Committee (FOMC). The ordinance indicate which appropriate stance of monetary policy to suit the time period of long run goals in price stability and sustainable economic growth between the FOMC meetings. FOMC purpose is to regulate the non-borrowed monetary base in the banking system which in turn influences the Fed fund rates. Transactions are mostly carried out at the trading desk of the New York Bank. Advantages of OMO compare to other policy: y y y y Complete control by the Fed. Flexible and precise (i.e. can influence changes of any size). Can be easily reverse. Can be implemented very quickly.

2.) Reserve requirements Reserve requirements are the amount of funds that a bank institution must hold in reserve against particular deposit liabilities as what stated by Federalreserve.gov. Reserve requirement influence the creation of money by the banking system with each dollar of reserves.

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An increase in the reserve requirement means that the banks are require to held more reserves and, therefore, causes a low loan supply, as a result raises the reserve ratio, lowers the money multiplier and decrease the money supply. Conversely, a decrease in reserve requirements lowers the reserve ratio, raises the money multiplier and increases the money supply. As what stated by the Investorglossary, reserve requirement policy has a influential effect on the money supply that it is considered too blunt to change the reserve regularly. So the Fed rarely uses this policy as it disrupts the business of banking. In equation form, required reserves are computed as: (1) Required Reserves = Required Reserve Ratio x Deposits Banks can hold more reserves than are required. Any reserves above what are required are excess reserves, or: (2) Excess Reserves = Legal Reserves - Required Reserves.

3.) Discount rate From investorwords.com, discount rate is the rate at which member banks may borrow short term funds directly from a Federal Reserve Bank. The discount rate is one of the two interest rates set by the Fed, the other being the Federal funds rate. The Fed actually controls this rate directly, but this fact does not really help in policy implementation, since banks can also find such funds elsewhere also called Federal Reserve Discount Rate. There are three types of discount loans: y Adjustment credit loans: For banks with temporary liquidity problems (mostly due to unexpected deposit outflow or insufficient reserves). These loans are usually paid back in a very short period of time (i.e. overnight or over the weekend) and can be attained over the phone. y Seasonal credit loans: For small and mid-sized banks that face seasonal liquidity problems (such as those in the farming communities or seasonal resort communities).
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Extended credit loans: For banks with severe liquidity problems. In order to obtain this type of loan, a bank needs to present a proposal featuring the need for the loan and the plan to fix those problems. This type of loans is typically given to prevent a bank failure or bankruptcy.

Moreover, federalreserve.gov stated that the Federal Reserve Banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. All discount window loans are fully secured. From federalreserve.gov, The discount rate charged for primary credit (the primary credit rate) is set above the usual level of short-term market interest rates. (Because primary credit is the Federal Reserve's main discount window program, the Federal Reserve at times uses the term "discount rate" to mean the primary credit rate.) The discount rate on secondary credit is above the rate on primary credit. The discount rate for seasonal credit is an average of selected market rates. Discount rates are established by each Reserve Bank's board of directors, subject to the review and determination of the Board of Governors of the Federal Reserve System. The discount rates for the three lending programs are the same across all Reserve Banks except on days around a change in the rate. The increases of discount rates will cause the money supply to shrink and decreases the rates will have the opposite effect.

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The Limited Control of Money Supply by Central Bank

The economy study gives an implication whereby Federal Bank is the main controller in the economy. However, to reinstate the statement, Federal Bank actually holds no major part in the money supply unless for the actions of printing and putting money into the economy. Therefore, as a whole of the economy system, the Federal Bank actually could not perfectly control the money supply in the economy as two situation might arise which primarily connected with the lenders and the borrowers. When the Federal Bank prints out a dollar of money and inserts it into the economy, the recipient of that dollar will in turn choose to spend or save it in the bank. If he chooses to put in the bank, he still has the dollar as it belongs to the deposit he has made. Therefore, an increase in the deposit in the bank makes the bank 1 dollar richer. The bank can subsequently lend out the money to the public and he still has a dollar and the first person who deposited his money also has it dollar. This can be illustrated in the sense that the first person has its deposit in the bank and the bank has it account receivable as he lends out the money to another person which makes the economy is one dollar richer than before. Furthermore, the second person who borrows the money from the bank can no doubt choose to spend or save it in another bank. As these processes go on, the economy automatically get richer and richer. So this is actually the act or the behavior of the citizen choose to spend or save, if the citizen save it in a bank, then the money multiplier will work and money supply is widening in that case, however, if the citizen choose to spend instead of to save, then the money multiplier stops there and no expanding in money supply in the economy. This explains why the Federal Bank cannot control the money supply perfectly. Another factor saying that Federal Bank cant perfectly control the money supply is that the banks themselves can actually choose to lend or not to lend the money to the public. Sometimes cases as such might happen if there is an adverse change towards the public. A bank might feel scared that a particular borrower might not have the ability to pay back or even the intention to pay back. This is non-other than speculation of the banker about the economic conditions which the bank might choose to hold more reserves than to lend them out. However, this is not a large problem. The Federal Bank can actually look into the data of the banks and

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look through their daily transactions to find out any changes in the bankers and subsequently take in action to counter it.

Federal Fund Rates

Putting aside all the 3 monetary tools, another tool that comes in handy whenever we talk about the money supply is the federal funds rate. Federal fund rates basically means the interest rate at which a depository instituition lends immediate amount of money or part of its available funds to another depository instituition overnight by charging them an amount of interest. Therefore, the money supply can actually be manipulated at a portion if they wish to. If the fuderal funds rate is high, most banks will not take action to borrow from another bank because they need to pay for the interest rate. Subsequently, the money supply could not expand.

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Discussion
1. Are credit card a form of money? No. Credit card is not a form of money. Money is as asset but credit acrd is not an asset. When a person uses a credit card, he or she is simply deferring payment for the item. Credit card can only be served as a temporary medium of exchange but not a store of value.

2. Who owns the Federal Reserve? The Federal Reserve is not owned by anyone since it is an independent entity within the government. The Fed is considered as an independent central bank because the President does not have any right to affect its decision. However, the Federal Reserve is actually largely a private corporation owned by its member banks.

3. Why the Central Bank has the right to set the interest rate of the country? According to the power given by the parliament of Malaysia, the Central Bank has the right to set the interest rate in the country. By doing so, the Central Bank could prevent commercial banks from setting too high interest rate to the public so that the money supply in the economy does not fluctuate too much. In other words, this is to ensure the stability of economy in the particular country.

4. What is the function of the latest Central Bank of Malaysia Act 2009? One of the functions of the latest Central Bank of Malaysia Act 2009 is to add on some of the Central Bank roles that are not included in the previous act. The central bank now has the authority to define monetary policy autonomously through the Monetary Policy Committee. Currently, the bank also has greater authoritarian reach and oversight than before. In addition, the act also gives acknowledgment to the conventional and Islamic Banking so that all the member banks can operate equivalently in Malaysia.

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5. So how does the OMO works? It functions by the fed purchases the securities from a bank or securities dealers and pays for the securities by adding a credit to the banks reserve for the amount purchased. A percentage of these new funds in the reserve have to be kept in the bank but the excess money can be lent to another bank in the federal funds market. By repeating this steps of loaning the excess reserve out, federal funds rate have to be lowered to increase the amount of money in the banking system and ultimately stimulate the economy by increasing business and consumer spending because banks have more money to lend and low interest rates. When the Fed wants to decrease the money supply, it sells securities. That transaction deducts the purchase amount or money supply from the bank's reserve. This reduces the amount of money the bank has to lend in the federal funds market and increases the federal funds rate. This move ultimately slows the economy down by decreasing the amount of money banks have to loan, which increases interest rates and typically reduces consumer and business spending.

6. So what if Chairman of the Board of Governors of the Federal Reserve System, Ben Bernanke wants to eliminate bank reserve requirement completely: Does it matter? What chaos will it result? Based on globaleconomicanalysis.blogspot, the act is going to shock every hyper inflationist in town (and perhaps every inflationist and deflationist too) but all Bernanke doing is only making a proposal to change the official policy so that it matches the current state of affairs. In simple terms, the proposal will change nothing. In essence, all the Bernanke proposal does is eliminates the need for banks to sweep and to keep an accounting of those sweeps. Sweeps allow banks to move (sweep) money from checking accounts into savings instruments nightly (unbeknown to customers who think the money is really there in their checking accounts)

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7. So basically how does loan create money? Based on money.howstuffworks.com, when banks loan money, that money is spent on goods or services. These goods or services create income for the people providing them, which they in turn spend on other goods and services. When lots of loans are made, even more spending is done and more money is pumping through the economy. When the Fed sees that too much money is going through the economy and prices are rising too quickly (inflation), they put the brakes on by selling securities. This reduces the amount of reserves available to banks, causing interest rates to rise, and banks will not make as many loans because it costs more for consumers to borrow. Ultimately, the economy slows down and inflation slows down with it.

8. Are federal fund rate a matter for banks only? No. Federal fund rate is not only the matter for banks, however, it explained more about the citizen as banks borrow money from other banks primarily is because of the citizen. Banks borrow money to provide them to the citizen in the form of returning their deposits. Therefore, it explains that people can in turn use the money to spend or to save in other bank. So it contributes to the economys money supply as well.

9. What does the Federal Reserve have to do with the federal funds rate? According to the Federal Bank, the Federal Reserve has a put on a target or an aim for the federal funds rate. Whenever the Federal Open Market Committee meets about 6 weeks, it will then decide to raise or lower that target.

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Conclusion
The fluctuations of money in the economy have huge impact on the society, community and country. The flow of cash within the economy can either expand or deteriorate the economy. Expansionary monetary policy is a simply policy which expands the supply of money, whereas contractionary monetary policy contracts the supply of a country's currency. Expansionary monetary policy causes an increase in bond price and a reduction in interest rates which will in turn lead to higher levels of capital investment and make domestic bonds less attractive, so the demand for domestic bonds falls and the demand for foreign bonds rises. When the demand for domestic currency falls and the demand for foreign currency rise, it will cause a decrease in the exchange rate. Lower exchange rate causes exports to increase, imports to decrease and consequently increase the level of the balance of trade. The effects of a contractionary monetary policy are precisely the opposite of an expansionary monetary policy. As a conclusion, money plays an important role by the federal bank to control the economy. Monetary policy has long run impacts on the rate of unemployment, the real wage, and the growth rate in the economy. Besides that, it influences the decisions that we make about how much we save, borrow and spend.

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