Ch010 - Chapter 10 Money Prices and the Federal Reserve...

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Chapter 10 Money, Prices, and the Federal Reserve Overview This chapter describes the role of money in modern economies: why it is important, how it is measured, and how it is created by commercial banks. The chapter introduces the Federal Reserve, the nation’s central bank, and discusses how it determines the money supply and uses monetary policy to affect the macroeconomy. Finally, the chapter discusses the important relationship between the amount of money in circulation and the rate of inflation in an economy, as summarized in the quantity equation. Core Principles Principle of Comparative Advantage – the efficiency of money compared to barter (eliminating the need for a double coincidence of wants) permits specialization according to comparative advantage, which greatly increases material standards of living. Important Concepts Covered Money Medium of exchange/store of value/unit of account Barter M1/M2 Bank reserves Reserve/deposit ratio Fractional and 100% reserve banking Federal Reserve System Open market operations Discount rate Reserve requirements Bank panic Deposit insurance Velocity of money Quantity equation Teaching Objectives After completing this chapter, you want your students to be able to: Define money and barter Discuss the three functions of money 141
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Identify and calculate M1 and M2 Define bank reserves, 100% and fractional reserve banking Calculate the reserve/deposit ratio Calculate the maximum amount a bank can lend and the effect of lending on M1 Define the federal reserve System and its parts Define open market operations Discuss the discount rate and reserve requirement Explain how the Fed can use the three tools of monetary policy Define bank panic and deposit insurance Explain the Fed's role in stabilizing financial markets Discuss the relationship between money and prices Understand and explain the quantity equation Chapter Outline I. Introduction/Overview A. Money is any asset that can be used in making purchases, from the cacao beans used by the Aztecs to shells, beads, feathers, and so on. B. Today money mostly consists of the currency and coin we use as well as the balance in checking accounts, which is virtually intangible since it’s really an entry in a computer. II. Money and Its Uses A. Money has three principal uses:
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