Economic Policy, Monetary Functions, and Financial Systems

Economic Policy: Impact on Interest and Exchange Rates

Economic policy refers to the strategies formulated by governments to drive a country's economy. These policies directly influence interest and exchange rates, as they consist of a set of measures, laws, regulations, subsidies, and taxes designed to alter economic incentives and performance.

Three Functions of Money in the Modern Economy

• Means of Payment: Money serves as a universal medium for exchange, accepted by banks and other institutions for transactions.
• Deferred Payments: This function facilitates future contracts, such as debt agreements and labor contracts.
• Store of Value: Money acts as a carrier of value, allowing currency to be spent immediately or saved for future transactions.

Financial Intermediaries in the Dominican System

Both monetary and non-monetary intermediaries are authorized by law to attract public funds in the form of deposits to provide loans to third parties. The key differences are:

• Monetary Financial Intermediaries: Include commercial and multi-service banks (for-profit).
• Non-Monetary Financial Intermediaries: Include public institutions, mortgage banks, savings and loan associations, and development banks (non-profit).

Banking Services: Accounts, Certificates, and Deposits

Banking services offer various ways to manage funds:

• Checking Accounts (Demand Deposits): Funds are available immediately via payment orders or checks.
• Savings Accounts: Funds are accessible via passbooks without the need for formal payment orders.
• Financial Certificates: Funds are held for a fixed term in exchange for interest; early withdrawal typically incurs a penalty.

The Velocity of Circulation of Money

The velocity of circulation of money is the number of times a single unit of currency changes hands within a year. Theoretically, it represents how often a monetary unit becomes income. While calculating total transactions is statistically difficult, economists typically use Real Gross Domestic Product (GDP) as a proxy, assuming a constant relationship between total transactions and real GDP in the short term.