Principles of Economics- Mankiw (5th) 603

Principles of Economics- Mankiw (5th) 603 - CHAPTER 27 T H...

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CHAPTER 27 THE MONETARY SYSTEM 623 policy of government deposit insurance has costs: Bankers whose deposits are guaranteed may have too little incentive to avoid bad risks when making loans. (This behavior is an example of a phenomenon, introduced in the pre- ceding chapter, called moral hazard. ) But one benefit of deposit insurance is a more stable banking system. As a result, most people see bank runs only in the movies. QUICK QUIZ: Describe how banks create money. ± If the Fed wanted to use all three of its policy tools to decrease the money supply, what would it do? CONCLUSION Some years ago, a book made the best-seller list with the title Secrets of the Temple: How the Federal Reserve Runs the Country. Although no doubt an exaggeration, this title did highlight the important role of the monetary system in our daily lives. Whenever we buy or sell anything, we are relying on the extraordinarily useful so- cial convention called “money.” Now that we know what money is and what de-
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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