Ec-6 - Chapter 13 Money Banks and the Federal Reserve System After this chapter you should be able to do the following Define money and discuss its

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Chapter 13: Money, Banks, and the Federal Reserve System After this chapter you should be able to do the following. Define money and discuss its four functions. Discuss the definitions of the money supply used in the United States today. Explain how banks create checking account deposits. Discuss the three policy tools the Federal Reserve uses to manage the money supply. Explain the quantity theory of money and use it to explain how high rates of inflation occur. 1
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What Is Money and Why Do We Need It? Money is an asset that is generally accepted in economic transactions or exchanges. Asset is anything of value owned by a person or a firm. Functions of money Medium of exchange Without money, all transactions must be via barter, which is problematic because of the double coincidence of wants. Money solves the double coincidence of wants because it is readily accepted in exchange for goods. 2
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Unit of account Prices are quoted in terms of money, making economic transactions easier Store of value Ideally, money will not change value over time, so exchanges don’t have to all happen at the same time. Money loses value during times of inflation, making it an imperfect store of value. Standard of deferred payment 3
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Criteria that make a good suitable to use as a medium of exchange : 1) The good must be acceptable to (that is, usable by) most traders. 2) It should be of standardized quality so that any two units are identical. 3) It should be durable so that value is not lost by spoilage. 4) It should be valuable relative to its weight so that amounts large enough to be useful in trade can be easily transported. 5) The medium of exchange should be easily divisible because different goods are valued differently. 4
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Commodity money is money with intrinsic value Example: A gold coin Fiat money is money without intrinsic value Example: A piece of paper that says it is legal tender for all debts, public and private, written on it 5
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U.S. economy There are many ways to perform a transaction and thus there are many definitions of money. The difference between the definitions of
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This note was uploaded on 04/19/2011 for the course ECON 200 taught by Professor Staff during the Winter '09 term at Indiana.

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Ec-6 - Chapter 13 Money Banks and the Federal Reserve System After this chapter you should be able to do the following Define money and discuss its

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