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Unformatted text preview: Chapter 09 - Money and Banking Chapter Nine Money and Banking CHAPTER OVERVIEW This chapter introduces students to the U.S. financial system. The chapter first covers the nature and functions of money and then discusses the Federal Reserve Systems definition of the money supply. Next, the chapter addresses the question of what backs money by looking at the value of money, money and prices, and the management of the money supply. The focus then turns to the institutional structure with is a rather comprehensive description of the U.S. financial system, which focuses on the features and functions of the Federal Reserve System. The second half of the chapter explains the fractional reserve system and the creation of checkable (demand) deposit money by commercial banks. A number of routine but significant introductory transactions are covered, followed by a description of the lending ability of a single commercial bank. Next, the lending ability and the money multiplier of the commercial banking system are traced through the balance statements of an individual bank. The chapter concludes with a discussion of the bank panics of 1930-1933, illustrating the vulnerability of a fractional reserve system and the important role of deposit insurance and confidence in the system. INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. List and explain the three functions of money. 2. Define the money supply, M1 and near-monies, M2. 3. State three reasons why currency and checkable deposits are money and why they have value. 4. Describe the structure of the U.S. banking system. 5. Explain why Federal Reserve Banks are central, quasi-public, and bankers banks. 6. Describe seven functions of the Federal Reserve System and point out which role is the most important. 7. Recount the story of how fractional reserves began with goldsmiths. 8. Explain the effects of a currency deposit in a checking account on the composition and size of the money supply. 9. Compute a banks required and excess reserves when given its balance-sheet figures. 10. Explain why a commercial bank is required to maintain a reserve and why it isnt sufficient to cover deposits. 11. Describe what happens to the money supply when a commercial bank makes a loan. 12. Describe what happens to the money supply when a loan is repaid. 13. Explain what happens to a commercial banks reserves and checkable deposits after it has made a loan. 14. Describe how a check drawn on one commercial bank and deposited in another will affect the reserves and excess reserves in each bank after the check clears. 9-1 Chapter 09 - Money and Banking 15. Describe what would happen to a single banks reserves if it made loans that exceeded its excess reserves....
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This note was uploaded on 08/02/2011 for the course ECON 2305 taught by Professor Wunder during the Spring '08 term at UT Arlington.
- Spring '08