Ch09 - CHAPTER 9 Money the Price Level and Inflation After...

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Money, the Price Level, and Inflation CHAPTER 9
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After studying this chapter you will be able to Define money and describe its functions Explain the economic functions of banks and other depository institutions Describe the structure and function of the Federal Reserve System (the Fed) Explain how the banking system creates money Explain what determines the demand for money, the supply of money, and the nominal interest rate Explain how the quantity of money influences the price level and inflation in the long run
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Money Makes the World Go Around Money has taken many forms. What is money today? What happens when the bank lends the money we’re deposited to someone else? How does the Fed influence the quantity of money? What happens when the Fed creates too much money?
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What is Money? Money is any commodity or token that is generally acceptable as a means of payment. A means of payment is a method of settling a debt. Money has three other functions: Medium of exchange Unit of account Store of value
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What is Money? Medium of Exchange A medium of exchange is an object that is generally accepted in exchange for goods and services. In the absence of money, people would need to exchange goods and services directly, which is called barter . Barter requires a double coincidence of wants, which is rare, so barter is costly. Unit of Account A unit of account is an agreed measure for stating the prices of goods and services.
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What is Money? Store of Value As a store of value , money can be held for a time and later exchanged for goods and services. Money in the United States Today Money in in the United States consists of Currency Deposits at banks and other depository institutions Currency is the general term for notes and coins.
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What is Money? Official Measures of Money The two main official measures of money in the United States are M1 and M2. M1 consists of currency and traveler’s checks and checking deposits owned by individuals and businesses. M2 consists of M1 plus time, saving deposits, money market mutual funds, and other deposits.
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What is Money? Figure 9.1 illustrates the composition of M1 and M2 in June 2005 and shows the relative magnitudes of their components.
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What is Money? Are M1 and M2 Really Money? All the items in M1 are means of payment. Some saving deposits in M2 are not means of payments—they are called liquid assets. Liquidity is the property of being instantly convertible into a means of payment with little loss of value. Deposits are money, but checks are not–a check is an instruction to a bank to transfer money. Credit cards are not money. A credit card enables the holder to obtain a loan quickly, but the loan must be repaid with money.
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Depository Institutions A depository institution is a firm that takes deposits from households and firms and makes loans to other households and firms.
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