141_Chapter_10_Lecture - Outline Lectures

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10 [23] The Money Supply and the Federal Reserve System OUTLINE OF TEXT MATERIAL I. Introduction A. This chapter begins the discussion of what money is and the role it plays in the U.S. economy. B. The text then describes the forces that determine the supply of money and show how banks create money. C. Finally, it describes the workings of the nation’s central bank (the Federal Reserve) and the tools it uses to control the money supply. II. An Overview of Money A. What Is Money? Money is anything generally accepted as a medium of exchange. 2. A Means of Payment, or Medium of Exchange a. A medium of exchange ( means of payment ) is anything sellers generally accept and buyers generally use to pay for goods and services. b. Economies that don’t use money run on the barter system. Goods are traded for other goods and services directly. c. Barter requires a double coincidence of wants, which can be a problem. d. Money eliminates many of the inefficiencies present in barter systems. 2. A Store of Value a. Money is an asset that usually maintains its purchasing power over time. b. There are other stores of value, but money has the advantages of (1) being available in convenient denominations and being easily portable, 90
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91 Principles of Macroeconomics and (2) it can be exchanged for all goods at any time. These two factors mean money is completely liquid (the liquidity property of money ). 3. A Unit of Account a. In money economies prices are quoted in the monetary unit. b. Even money economies could use some other good for pricing, but that would not be efficient as buyers and sellers would be forced to constantly convert from the money unit into prices and back again. B. Commodity and Fiat Monies 1. Commodity monies are those items used as money that also have an intrinsic value in some other use. Cigarettes have long been used as money in prisons. 2. Fiat money ( token money ) is intrinsically worthless but has value because it is accepted in exchange for valuable goods and services. 3. Most governments monopolize the printing of money by declaring it to be legal tender . The government also promises that it will not print so much that the money will lose its purchasing power ( currency debasement ). C.
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This note was uploaded on 06/15/2010 for the course EC 141DLC taught by Professor Antonifirner during the Fall '09 term at Park.

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141_Chapter_10_Lecture - Outline Lectures

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