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Unformatted text preview: 247 10  The Money Supply and the Federal Reserve System C hapter objectives: 1. Identify the three functions of money. List the various types of money and the differences among them. 2. Identify two different measures of the U.S. money supply. 3. Determine which items are assets and which are liabilities on a banks balance sheet. Distinguish among total, excess, and required reserves. Describe the process of deposit creation. Derive and explain the importance of the money multiplier. 4. Outline the functions of the Federal Reserve (the Fed). Identify the three monetary policy tools of the Fed and how they are adjusted to increase (decrease) the money supply. 5. Analyze the Feds ability to expand or contract reserves and the money supply. This chapter begins to build a model of the financial market that continues in Chapter 11 (26), where the factors that determine the demand for money holdings and the establishment of money market equilibrium are considered. This model will then be combined with the aggregate expenditure model in Chapter 12 (27). It is important that you develop a good understanding of financial markets at this point. BRAIN TEASER: In 2000 the United States introduced its eighth dollar cointhe Sacagawea golden dollar. Over one billion of the coins were minted during 2000. About half remained in the vaults of Federal Reserve Banks and the U.S. Mint and the other half were in circulation. However, a large proportion of the circulating dollars were being hoarded. Are the Sacagawea dollars money? In practice, do they perform the functions of money? OBJECTIVE 1: Identify the three functions of money. List the various types of money and the differences among them. 248 Study Guide to Principles of Macroeconomics Money fulfils three functions in the economy. The three functions of money are: (a) a medium of exchange (or means of payment) (b) a store of value (c) a unit of account (page 181 ) Before money, there was barter. But because trading goods for goods relies on a double coincidence of wants (where each trader must be willing to trade something that the other trader is willing to accept), barter was inefficient. Commodity money (a good that has some value over and above its value as money) was an intermediate stage between barter and the fiat money of the modern economy. Gold and cigarettes are examples of commodity money. Dollar bills (Federal Reserve notes) are fiat moneythey derive their value from the willingness of individuals to accept them as payment. That willingness, in turn, derives from the governments declaration that its notes are legal tenderan acceptable means of settling all debts, private and public. To ensure compliance, the government must protect its currency from being debased, either through forgery or by printing too much of it. (page 182 ) LEARNING TIP: In this section, liberate yourself from equating money with dollar bills. Try a thought experiment: If dollars (and checks, etc.) disappeared overnight, how would the U.S. economy adapt? What experiment: If dollars (and checks, etc....
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This note was uploaded on 02/13/2010 for the course ECON 1102 taught by Professor Wissink during the Spring '09 term at Cornell University (Engineering School).
- Spring '09
- Federal Reserve (The Fed)