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money - E202 Money MONEY Definition Money is the medium of...

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E202 - Money 1 M ONEY Definition Money is the medium of exchange Money is defined as those things which are generally acceptable as a means of payment. Other characteristics • Store of value Money is one form in which wealth can be held. • Standard of value (unit of account) Prices are usually stated in terms of the monetary unit. • Standard of deferred payment Debts are usually denominated in terms of the monetary unit. K INDS OF M ONEY Commodities Gold and silver coins played a role in the domestic U.S. monetary system until the 1930s. Gold played a role in the international aspects of the U.S. monetary system until the 1970s. Paper Currency in the form of privately issued bank notes was used in the U.S. until 1913. The federal government issued paper money (greenbacks) in the 1860s and 1870s Since 1913 the Federal Reserve has issued U.S. currency. Federal Reserve notes are a fiat paper money. Federal Reserve notes are liabilities of the Fed. Deposits Checkable deposits at banks came into use as a means of payment during the mid-19th century. Deposits are liabilities of banks.
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E202 - Money 2 F EDERAL R ESERVE C HECK C LEARING Situation $1000 check: Drawn on Wisconsin National Bank (WNB) Deposited in Bloomington National Bank (BNB). Check cleared by the FRB of Chicago (Fed) Clearing Process BNB “settles” with WNB using their reserve accounts at the Fed. Notation D – checking account (liability of bank) R – reserve account (asset of bank; liability of Fed) Outcome BNB Fed WNB Bank receiving deposit (BNB) gains reserves Bank losing deposit (WNB) loses reserves Total reserves of banking system are not changed M EASUREMENT OF M ONEY M1 = Currency + Checkable deposits ( %) ( %) • M1 is money per se . U.S. M1 is currently (as of 5/00) $ trillion. Data on M1 are reported by the Fed every Thursday. M2 = M1 + Near money Near money includes savings and small time deposits, and retail money market mutual funds. U.S. M2 is currently (as of 5/00) $ trillion. Data on M2 are reported by the Fed every Thursday.
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E202 - Money 3 F INANCIAL S ECTOR F ED B ALANCE S HEET Assets Liabilities/Net Worth Foreign Exchange FX FR Notes CinC Discount Window Loans DW Reserve Accounts R Govt. Securities GS U.S. Treasury Accounts Other Assets
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