econ notes 10.28

econ notes 10.28 - Income from these activities is their...

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The Role of Money What is money really? A medium of exchange An asset used to buy and sell goods and services A store of value An asset that allows people to transfer purchasing power from one period to another A unit of account A unit of measurement used by people to post prices and keep track of revenues/costs Measuring the money supply Two basic measurements of the money supply are M1 and M2 Components of M1 include Currency Checking deposits Travelers’ checks Components of M2 include M1 Savings Time deposits (CDs, etc.) Money market mutual funds Introduction to Banking The banking industry includes Commercial banks Savings and loans Credit unions Banks are profit-seeking institutions Banks accept deposits and use part of them to extend loans and make investments
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Unformatted text preview: Income from these activities is their major source of revenue Banks play a central role in the market for loanable funds (capital market) They bring together savers and borrowers Banks provide services and pay interest to attract deposits Most of these deposits are invested and loaned out, providing interest income for the bank The U.S. banking system is a fractional reserve system Banks are required to maintain only a fraction of assets as reserves against customer deposits These are called ‘required reserves’ Under a fractional reserve system, increase in deposits provides bank with excess reserves...
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