Chapter 10_Money Banks Federal Reserves

Chapter 10_Money Banks Federal Reserves - MONEY, BANKS, AND...

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MONEY, BANKS, AND THE FEDERAL RESERVE 10 CHAPTER
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Objectives After studying this chapter, you will able to Define money and describe its functions Explain the economic functions of banks and other depository institutions and describe how they are regulated Explain how banks create money Describe the structure of the Federal Reserve System (the Fed), and the tools used by the Fed to conduct monetary policy Explain what an open market operation is, how it works, and how it changes the quantity of money
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Money makes the World Go Around Money has taken many forms; what is money now? What do banks do, and can they create money? What is the Fed and what does it do? How does the Fed ensure that the economy has the right amount of money to function properly?
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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 the United States consists of Currency Deposits at banks and other depository institutions Currency is the general term for bills and coins.
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What is Money? The two main official measures of money in the United States are M1 and M2. M1 consists of currency outside banks, traveler’s checks, and checking deposits owned by individuals and businesses. M2 consists of M1 plus time deposits, savings deposits, and money market mutual funds and other deposits.
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What is Money? Figure 26.1 illustrates the composition of these two measures in 2001 and shows the relative magnitudes of the components of money.
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What is Money? 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 of value. Checkable deposits are money, but checks are not– checks are instructions to banks to transfer money. Credit cards are not money. Credit cards enable the holder to obtain a loan quickly, but the loan must be repaid with money.
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A depository institution is a firm that accepts deposits from households and firms and uses the deposits to make loans to other households and firms. The deposits of three types of depository institution
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This note was uploaded on 11/12/2008 for the course FIN ECON ECON taught by Professor Ramady during the Winter '08 term at John Brown.

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Chapter 10_Money Banks Federal Reserves - MONEY, BANKS, AND...

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