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DISCOUNT WINDOW: The means by which the central bank (the Federal Reserve in the United States) makes discount loans to banks. It is through the discount window that banks can obtain the reserves that the might meet their liquidity needs and satisfy reserve requirements. The criteria to manage the discount window are dictated by the discount policy, which includes setting the discount rate and the terms of discount lending. This policy is a way to influence money supply since it can change the volume of the discount loans throughout the banking system.

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Lesson 17: Money | Unit 2: More About Money Page: 10 of 25

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  • The four functions of money:
    1. Medium of exchange: money makes it easier to buy, sell, produce, and consume goods and services.
    2. Measure of value: prices are stated in terms of the monetary unit.
    3. Store of value: value can be stored over time with money.
    4. Standard of deferred payment: future payments are also in terms of the monetary unit.
  • Using money as a medium of exchange eases the exchange process, makes it more efficient, and frees resources for production.
  • Using money as the unit for prices gives a measure for value, that is, how much value we place on a good.
  • Price inflation is the nemesis for the store of value function of money.
  • Money is used as a standard for buying now and paying later.
  • The four characteristics of money:
    1. Durable: It helps to retain value from one exchange to do the next and store value for future exchanges.
    2. Divisible: It lets us accurately match an amount of money to the precise value of a good.
    3. Transportable: It allows us to conduct exchanges far and wide, to go where we need to go for an exchange.
    4. Non-counterfeitable: It keeps the value of money from being diluted.

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ALLOCATION EFFECT

A change in the allocation of resources caused by placing taxes on economic activity. By creating disincentives to produce, consume, or exchange, taxes generally alter resource allocations. The allocation effect is typically used when governments seek to discourage the production, consumption, or exchange of particular goods or activities that are deemed undesirable (such as tobacco use or pollution). This is one of two effects of taxation. The other (primary) is the revenue effect, which is the generation of revenue used to finance government operations.

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