Lecture_5 - The Monetary System THE MEANING OF MONEY Money...

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The Monetary System THE MEANING OF MONEY Money is the set of assets in an economy that people regularly use to buy goods and services from other people. The Functions of Money o Money has three functions in the economy: 0. Medium of exchange 1. Unit of account 2. Store of value The Functions of Money o Medium of Exchange 3. A medium of exchange is an item that buyers give to sellers when they want to purchase goods and services. 4. A medium of exchange is anything that is readily acceptable as payment. The Functions of Money o Unit of Account 5. A unit of account is the yardstick people use to post prices and record debts. o Store of Value 6. A store of value is an item that people can use to transfer purchasing power from the present to the future. The Functions of Money o Liquidity is the ease with which an asset can be converted into the economy’s medium of exchange. The Kinds of Money o Commodity money takes the form of a commodity with intrinsic value. 7. Examples: Gold, silver, cigarettes. o Fiat money is used as money because of government decree. 8. It does not have intrinsic value. 9. Examples: Coins, currency, check deposits. Money in the U.S. Economy
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o Currency is the paper bills and coins in the hands of the public. o Demand deposits are balances in bank accounts that depositors can access on demand by writing a check. Figure 1 Two Measures of the Money Stock for the U.S. Economy CASE STUDY: Where Is All The Currency? o In 2004 there was $699 billion of U.S. currency outstanding. 10.That is $3,134 in currency per adult. o Who is holding all this currency? 11.Currency held abroad 12.Currency held by illegal entities THE FEDERAL RESERVE SYSTEM o The Federal Reserve (Fed) serves as the nation’s central bank. 0. It is designed to oversee the banking system. 1. It regulates the quantity of money in the economy. THE FEDERAL RESERVE SYSTEM o The Fed was created in 1913 after a series of bank failures convinced Congress that the United States needed a central bank to ensure the health of the nation’s banking system. THE FEDERAL RESERVE SYSTEM o The primary elements in the Federal Reserve System are: 2. The Board of Governors 3. The Regional Federal Reserve Banks 4. The Federal Open Market Committee The Fed’s Organization o The Fed is run by a Board of Governors, which has seven members appointed by the president and confirmed by the Senate. o Among the seven members, the most important is the chairman.
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13.The chairman directs the Fed staff, presides over board meetings, and testifies about Fed policy in front of Congressional Committees. The Fed’s Organization o The Board of Governors 14.Serve staggered 14-year terms so that one comes vacant every two years. 15.President appoints a member as chairman to serve a four-
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Lecture_5 - The Monetary System THE MEANING OF MONEY Money...

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