Money and the Banking System CHAPTER 13 Normally we expect government.docx - Money and the Banking System CHAPTER 13 Normally we expect governments to

Money and the Banking System CHAPTER 13 Normally we expect government.docx

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Money and the Banking System CHAPTER 13 Normally we expect governments to prevent the wholesale failures of banks. But during the recent financial crisis, the country of lceland took the opposite approach and let the major banks in the country simply collapse Beginning in 2003, the three major banks in lceland changed their business model aggressive intermational banking institutions, attract- ing deposits from foreign countries and vastly expanding their portfolio of loans. The result was 5 years of incredible prosperity for the country and its bank. Unfortunately, when the world financial Crisis hit in 2008, this financing model no longer was sustainable. Funds quickly disappeared from the banks and the govenment and the people of lceland faced a stark choice: bail out the banks by using public funds or let the banks go bankrupt and let those who invested in the banks take losses. Eventualy, lceland decided on the bankruptcy route, much to the dismay of investors abroad. Unlike Ireland, which faced a similar situation, the govern- ment and the people of loeland were willing to let the banks fail. Although this caused a severe recession for lceland, the longer-run prospects for the economy are sound and lceland has actually recovered faster than many of the countries that bailed out its banks. KAUPElNG become CHAPTER OUTLINE AND LEARNING OBJECTIVES 13.1 What Is Money'?, page 209 Identify the components of money in the U.S. economy. 13.4 What the Federal Reserve Does during a Financial Crisis, page 280 Discuss examples of how the Federal Reserve acts during financial crises. 13.2 How Banks
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Create Money, page 273 Explain the process of multiple expansion and contraction of deposits. MyEconLab MyEconLab helps you master each objective and study more efficiently. 13.3 A Banker's Bank: The Federal Reserve, page 278 Describe the structure of the Federal Reserve. CHAPTER 1s MONEY AD THE BAN G E The term momey has a special meaning for economises, so in this chapter we look carefuly st how money is defined and the rode it plays in the econoemy. The overall level of money affects the performance of an econcy In a prior chapter, we learned that increases in the money suPply increase aggregate denmand. In the short run, when prices ane largely fived, this increase will rsise tosal demand nd output. Bun in the long run, continuing money gnowth leads to inflation. ur nation's central bank, the Federal Reserve (commonly called the "Fed , s responsible for controlling the money supply. In this chapter, we see how the Federal Reserve is stractured, how it operates, and why it's so powerful 269 What Is Money? Learning Objective 13.1 Economists define money as any inems that are regularly used in economic transactions kdny the components of money in the US. onoy d accepted by buyers and sellers. Let's consider some examples of money used in that way We use money regularly every day. In a coffee shop, we hand the person behind the counter some dollar bills and coins, and we receive a cup of coffee. This is an example of an economic exchange: One party hands over currency-the dolllar bills and the coins-and the other party
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hands over goods and services-the coffee. Why do the owners
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