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Unformatted text preview: Chapter 29Chapter 29 The Monetary System WHAT’S NEW IN THE THIRD EDITION: There have been no substantial changes to this chapter. LEARNING OBJECTIVES: By the end of this chapter, students should understand: what money is and what functions money has in the economy. what the Federal Reserve System is. how the banking system helps determine the supply of money. what tools the Federal Reserve uses to alter the supply of money. CONTEXT AND PURPOSE: Chapter 16 is the first chapter in a two-chapter sequence dealing with money and prices in the long run. Chapter 16 describes what money is and develops how the Federal Reserve controls the quantity of money. Since the quantity of money influences the rate of inflation in the long run, the following chapter concentrates on the causes and costs of inflation. The purpose of Chapter 16 is to help students develop an understanding of what money is, what forms money takes, how the banking system helps create money, and how the Federal Reserve controls the quantity of money. An understanding of money is important because the quantity of money affects inflation and interest rates in the long run, and production and employment in the short run. 1 2 ✦ Chapter 29/The Monetary System KEY POINTS: 1. The term money refers to assets that people regularly use to buy goods and services. 2. Money serves three functions. As a medium of exchange, it provides the item used to make transactions. As a unit of account, it provides the way in which prices and other economic values are recorded. As a store of value, it provides a way of transferring purchasing power from the present to the future. 3. Commodity money, such as gold, is money that has intrinsic value: It would be valued even if it were not used as money. Fiat money, such as paper dollars, is money without intrinsic value: It would be worthless if it were not used as money. 4. In the U.S. economy, money takes the form of currency and various types of bank deposits, such as checking accounts. 5. The Federal Reserve, the central bank of the United States, is responsible for regulating the U.S. monetary system. The Fed chairman is appointed by the President and confirmed by Congress every four years. The chairman is the lead member of the Federal Open Market Committee, which meets about every six weeks to consider changes in monetary policy....
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- Spring '10
- Federal Reserve System