S government securities What backs the money supply Money as debt promises to

S government securities what backs the money supply

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term credit instruments such as certificates of deposit, and U.S. government securities What backs the money supply Money as debt: promises to pay Value of money Acceptability: widely accepted that is why they are money Legal Tender: Government ensures them as legal tender Relate Scarcity: is scarce so it has an economic value Money and Prices The purchasing power of the dollar: $Value = 1/Price Inflation and acceptability: inflation and hyper inflation happened when the government issued so many pieces of paper currency that the purchasing power if each of those units of money was almost totally undetermined Stabilizing Money’s Purchasing Power Rapid inflation erodes the purchasing power of money Monetary policy is used to regulate the purchasing power of money The Federal Reserve and the Banking System: The Federal Reserve System: directs the activities of the 12 federal reserve banks, which in turn control the lending activity of the nations banks and thrift institutions Historical Background: Was decentralized, many problems Board of Governors: 7 members; 14 yr terms; new one every 2 years 12 Fed Reserve Banks: Private and public control: Central Bank Quasi-Public Banks Bankers’ Banks FOMC: Board of Governers + pres of NY fed bank + pres of 4 other banks one year terms Comercial Banks and Thrifts: Fed Functions and Money Supply Issuing Currency Setting the reserve requirements land holding reserves Lending to financial institutions and serving as an emergency lender of last resort
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Providing for check collection Actions as a fiscal agent Supervising banks Controlling the money supply Federal Reserve Independence: So they don’t get influenced by politics
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