Chapter 12

Chapter 12 - Money and Banking CHAPTER TWELVE MONEY AND...

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Money and Banking CHAPTER TWELVE MONEY AND BANKING INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. List and explain the three functions of money. 2. Define the money supply, M1 and near-monies, M2, and MZM. 3. State three reasons why currency and checkable deposits are money and why they have value. 4. Explain the relationship between the purchasing power of money and the amount of money in circulation. 5. Describe the structure of the U.S. banking system. 6. Explain why Federal Reserve Banks are central, quasi-public, and bankers’ banks. 7. Describe seven functions of the Federal Reserve System and point out which role is the most important. 8. Summarize and evaluate the arguments for and against the Federal Reserve System remaining an independent institution. 9. Describe the conditions that have caused the loss of market share of banks and thrifts to pension funds, insurance companies, mutual funds, and securities-related firms. 10. Identify three major changes continuing to occur in the financial services industry. 11. Describe and explain the significance of electronic payments. 12. Define and identify terms and concepts listed at the end of the chapter. LECTURE NOTES I. Learning objectives – In this chapter students will learn: A. About the functions of money and the components of the U.S. money supply. B. What “backs” the money supply, making us willing to accept it as payment. C. The makeup of the Federal Reserve and the U.S. banking system. D. The functions and responsibilities of the Federal Reserve. II. Functions of Money A. Medium of exchange: Money can be used for buying and selling goods and services. B. Unit of account: Prices are quoted in dollars and cents. C. Store of value: Money allows us to transfer purchasing power from present to future. It is the most liquid (spendable) of all assets, a convenient way to store wealth. III. Components of the Money Supply A. Narrow definition of money: M1 includes currency and checkable deposits (see Figure 12.1a). 1. Currency (coins + paper money) held by public. (54% of M1) 181
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Money and Banking a. Is “token” money, which means its intrinsic value is less than actual value. The metal in a dime is worth less than 10¢. b. All paper currency consists of Federal Reserve Notes issued by the Federal Reserve. 2. Checkable deposits are included in M1, since they can be spent almost as readily as currency and can easily be changed into currency. (46% of M1) a. Commercial banks are a main source of checkable deposits for households and businesses. b.
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This note was uploaded on 09/10/2009 for the course ECO 2251 taught by Professor Kirkland during the Spring '09 term at Troy.

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Chapter 12 - Money and Banking CHAPTER TWELVE MONEY AND...

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