Entirely, in your own words, and in detail: define money and discuss the four functions of money; discuss

the definitions of the money supply used in the United States today; explain how banks create money; discuss the three policy tools the Federal Reserve uses to manage the money supply; explain the quantity theory of money, and use it to explain how high rates of inflation occur

Money can me different things depending on the context. A barter economy does not use money. Goods and services are traded for directly between providers and consumers assuming that each wants what the other has. Money is an asset which people are willing to accept as an exchange for goods and services or debt payments. The Four Functions of Money are: It is a medium of exchange - for the purchase or sale of goods, services, and assets A unit of account for pricing goods, services, or assets as well as payment of debt. A store of value where money can be held with an assumption it will not significantly lose its value in the short term. A standard for deferred payment for pricing goods, services, or assets as well as payment of debt.

The Money Supply as measured in the US can be defined as the money in two accounts; the M1 account which includes currency, checking account balances, and travelers checks, the M1 account is a good gauge of the liquidity available to consumers. The M2 account is a broader definition of the money supply and includes the M1 account plus saving accounts, small time deposit accounts (CDs) , money market funds deposited in banks, and non-institutional money market fund shares. Banks create money, - by loaning deposits (liabilities) and creating loans (assets). Profits from loans accrue to banks via the payment of interest to the Bank which is generally higher than the interest paid on deposits. Loans generally become deposits which are again loaned out. This process repeats itself turning an initial deposit of $1,000.00 in to as much as $10,000.00 until all the principle is loaned out minus required reserves. The Three Policy Tools used by the Federal Reserve to manage the money supply are: Open Market Operations used for the buying and selling of Treasury securities to expand or contract the money supply. The Discount Policy used of discount loans from the Fed to the Banks at the discount rate for interests. Setting Reserve Requirements used by the Fed to limit how much money can be lent from each dollar deposited

The Quantity Theory of Money relates money supply to price levels using the equation M x V = P x Y, Where M is the money supply, V is the Velocity of Money, P is the Price Level and Y is the real output. If one assumes that V (the average number of times each dollar is spent throughout the year), then the money supply M is directly proportional to the Price Level and the Real Output. M increases as P and / or Y increase and M decreases as P and / or Y decrease. While not exact, it is true that in the long run inflation increases if the money supply grows faster than real GDP.