Chapter 20 - Chapter 20: Managing Financial Resources What...

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Chapter 20: Managing Financial Resources What is Money? Money- anything that people generally accept as payment for goods and services - Until the 1880s, cowries shells were one of the wwworld’s most abundant currencies Barter- the trrrading of goods and services for the other goods and services directly - People need objects that are portable, divisible, durable, and stable so that they can trade goods and services without carrying the actual goods arouund with them Coins met five standards for a useful form of money: - Portability- coins are a lot easier to take to market than pigs or other heavy products - Divisibility- different sized coins could be made to represent different values - Stability- when everybody agrees on the value of coins, the value of money is relatively stable - Durability- coins last for thousands of years - Uniqueness- its hard to counterfeit, copy, elaborately design and minted coins What is the Money Supply? - What is the money supply? - Why does it need to be controlled? Money supply- amount of money the Federal Reserve Bank makes available for people to buy goods and services
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- There are several ways of referring to the money supply: o M-1 – money that can be accessed quickly and easily (coins, and paper money, checks, travelers checks) o M- 2 – money included in M-1 plus money that may take a little more time to obtain (savings accounts, money market accounts, mutual funds, certificates of deposits) M-2 is the most commonly used definition of money Why does the Money Supply Need to be Controlled? - What would happen if the Fed took some of the money out of the economy? What would happen to the prices? o Prices would go down because there would be an oversupply of goods and services compared to the money availble to buy them (aka deflation) The Global Exchange of Money Falling dollar value- the amount of goods and services you can buy with a dollar decreases Rising Dollar value- the amount of goods and services you can buy with a dollar goes up - What makes the dollar weak or strong is the position of the US economy relatively to other economies Control of the Money Supply Basics about the Federal Reserve The Federal Reserve System consists of five major parts: 1) The board of governors 2) The federal open market committee 3) 12 Federal Reserve banks 4) Three advisory councils
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5) The member banks of the system - The board of governors administers and supervises the 12 Federal Reserve banks
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This note was uploaded on 03/20/2008 for the course BINT 101 taught by Professor Lifton during the Fall '07 term at Ithaca College.

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Chapter 20 - Chapter 20: Managing Financial Resources What...

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