Chapter 11 -...

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www.swcollege.com/bef/arnold/instructor/arnold6e/im21.doc CHAPTER 12 Money and Banking What is money ? Where does it come from? What purposes does it serve? To what extent can we control the amount and disposition of money? The answers to these questions are a very significant part of the foundation of the macroeconomy. Money is essential in promoting the level of exchange and savings/investment essential to maintaining and expanding a nearly $10 trillion economy. This chapter takes up the questions of what money is and is not, where it comes from, what gives money its value, and how banks and the banking system can influence and control the supply and disposition of money. Chapter 13 will continue this discussion, turning to the institution that oversees the U.S. banking system and the supply of money in the U.S. economy: the Federal Reserve System (the Fed). CHAPTER OBJECTIVES Upon completing this chapter, your students should be able to: 1. Discuss how money evolved out of a barter economy. 2. List and explain the functions of money. 3. Explain what gives money its value. 4. Define the money supply. 5. Explain why credit cards are not money. 6. Explain how banking developed. 7. Explain the role banks play in the money creation process. KEY TERMS money savings deposits barter money market deposit account medium of exchange • money market mutual fund unit of account • fractional reserve banking store of value • Federal Reserve System (the Fed) double coincidence of wants • reserves Gresham’s Law • required-reserve ratio ( r ) M1 required reserves Currency excess reserves Federal Reserve Notes • T-account checkable deposits • simple deposit multiplier M2 cash leakage 125
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126 Chapter 12 time deposits
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Money and Banking 127 CHAPTER OUTLINE I.MONEY: WHAT IS IT, AND HOW DID IT COME TO BE? A.Money: A Definition —Though often confused with other things, such as income, wealth, and credit , money is any good that is widely accepted in exchange of goods and services, as well as the payment of debts . B.Three Functions of Money —Perhaps the best way to define money is to look at the functions it serves. 1.Money as a Medium of Exchange —If there were no money, goods would have to be exchanged through the process of barter ; that is, goods would be traded for other goods in transactions arranged on the basis of mutual need. For example, if I make shoes and want to “purchase” some bread, I would have to find a baker who needs shoes and then arrange to trade him shoes for bread—that is, there must be a double coincidence of wants . Money eliminates the need for such arrangements and the (often prohibitive) transaction costs that accompany arranging such trades. In a money economy, money, rather than goods, is the medium of exchange via which transactions are made. 2.Money as a Unit of Account
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Chapter 11 -...

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