Ch 09 - C h a p t e r 9 : M o n e y, T h e P r i c e L e v...

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C h a p t e r 9 : M o n e y , T h e P r i c e L e v e l , a n d I n f l a t i o n I. What is Money? A. Money is any commodity or token that is generally acceptable as a means of payment. 1. A means of payment   is a method of settling a debt. 2. Money has three other functions: a) Medium of exchange b) Unit of account c) Store of value B. Medium of Exchange 1. A medium of exchange is an object that is generally accepted in exchange for goods and services. 2. In the absence of money, people would need to exchange goods and services directly, which is called barter . 3. Barter requires a double coincidence of wants , whereby each person in the barter transaction has what the other wants. This situation is rare, so barter is costly. C. Unit of Account 1. A unit of account is an agreed measure for stating the prices of goods and services. D. Store of Value As a store of value , money can be held for a time and later exchanged for goods and services. E. Money in the United States Today 1. Money in the United States consists of bills and coins held by individuals and businesses—called currency —and deposits at banks and other depository institutions. 2. The two main official measures of money in the United States are M1 and M2. 3. M1 consists of currency outside of banks, traveler’s checks, and checking deposits owned by individuals and businesses. 4. M2 consists of M1 plus time deposits, savings deposits, and money market mutual funds and other deposits. 5. Figure 9.1 graphically illustrates the composition of these two measures in 2006 and shows the relative magnitudes of the components of money. 6. The items in M1 clearly meet the definition of money; the items in M2 do not do so quite so clearly but still are quite liquid. Liquidity is the property of being instantly convertible into a means of payment with little loss in value. 7. Checkable deposits are money, but checks are not; checks merely are the means by which the money is transferred among people. 8. Credit cards are not money. Credit cards enable the holder to obtain a loan quickly, but ultimately the loan must be repaid with money.
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II. Depository Institutions A. A depository institution is a firm that takes deposits from households and firms and makes loans to other households and firms. The deposits of three types of depository institution make up the nation’s money: 1. Commercial banks 2. Thrift institutions 3. Money market mutual funds B. Commercial Banks 1. A commercial bank is a firm that is licensed by the Comptroller of the Currency or by a state agency to receive deposits and make loans. 2. Banks divide the funds they receive into two parts: reserves and loans. Reserves are the cash in a bank’s vault and deposits at Federal Reserve Banks. Loans take the form of liquid assets, investment securities, and loans C. Thrift Institutions The thrift institutions are savings and loan associations, savings banks, and credit unions. D.
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Ch 09 - C h a p t e r 9 : M o n e y, T h e P r i c e L e v...

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