sg13 - 13 Money and the Banking System Chapter Summary In...

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13 Money and the Banking System Chapter Summary In this chapter, we’ll look carefully at how money is defined and the role that it plays in the economy. The overall quantity of money in circulation affects the performance of an economy. We will also see how money is created in the banking system. Lastly, we will look at the bankers’ bank—the Federal Reserve (the “Fed”)—and how it is organized. Here are the main points of the chapter: Money consists of anything that is regularly used to make exchanges. In modern economies, money consists primarily of currency and deposits in checking accounts. Banks are financial intermediaries that earn profits by accepting deposits and making loans. Deposits, which are liabilities of banks, are included in the money supply. Banks are required by law to hold a fraction of their deposits as reserves, either in cash or in deposits with the Federal Reserve. Total reserves consist of required reserves plus excess reserves. If there is an increase in the supply of reserves in the banking system, the supply of money will expand by a multiple of the initial increase in reserves. This multiple is known as the money multiplier. Decisions about the supply of money are made at the Federal Open Market Committee (FOMC), which includes the seven members on the Board of Governors and the president of the New York Federal Reserve Bank, as well as four of the 11 other regional bank presidents, who serve on a rotating basis. In a financial crisis like those that occurred in 1987 and 2001, the Fed can help stabilize the economy. Former Fed chairmen Paul Volcker and Alan Greenspan have been powerful and important figures in the national economy. Applying the Concepts After reading this chapter, you should be able to answer these four key questions: 1. What fraction of the stock of U.S. currency is held overseas? 2. Who were the two men who served as chairman of the Federal Reserve from 1979 to 2006, and what were their principal accomplishments? 3. How did the Fed successfully respond to the major stock market crash in 1987? 4. How did the Fed manage to keep the financial system in operation immediately following the attacks on September 11, 2001?
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188 Chapter 13 13.1 What Is Money? Economists define money as any items that are regularly used in economic transactions or exchanges and accepted by buyers and sellers. Let’s consider some examples of money used in that way. Clearly, currency is money because people can use it to purchase coffee, newspapers, candy, movie tickets, and other goods. Checks also function as money because people use them to pay suppliers, such as utility suppliers. In some ancient cultures, people used precious stones in exchange for goods such as food and clothing. In more recent times, gold bars have served as money. During World War II, prisoners of war did not have currency, but they did have rations of cigarettes, so they used them like money, trading them for what they wanted. Regardless of what the item is that is used for money, money has three basic
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sg13 - 13 Money and the Banking System Chapter Summary In...

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