The Financial Sector
From Saving to Investment
Financial markets are a vital part of a free enterprise economy.
These are place where individuals and firms enter relationships:
savers give funds to a financial institution, which gives them a return in
Chapter 14, p. 263-267
Objective Of Monetary Policy
The fundamental objective of monetary policy as practiced by the Federal Reserve Banks is
to assist the economy in achieving a full-employment, non-inflationary level of total output.
Chapter 13 p. 245-251
Fractional Banking Reserve System
Only a portion of checkable deposits is backed up by cash in bank vaults or deposits at
the central bank. The US and most other countries today operate this way. Historically,
Chapter 13 p. 251-254
The Banking System: Multiple Deposit Expansion
The commercial banking system can create money, by a multiple of its excess reserves.
Multiple lending is possible even though each bank in the system is limited by the
Loanable Funds Money Market, p. 529-534
The Interest rate is determined in Loanable Funds Money Market.
Fewer investment projects will be undertaken when the interest rate rises. More investment
projects will be undertaken when the interest
Chapter 14 p. 265-266
Balance Sheet approach
A balance sheet is a statement of assets, liabilities and net worth. Assets are items of
economic value; liabilities are debts or obligations, and net worth is the equity remaining.
Chapter 13, p. 254-260
Federal Reserve System
Established by an Act of Congress in 1913. It is the system that coordinates
commercial banking operations, regulates some aspects of all depository institutions and
oversees the United Sates
Chapter 14W, p. 14W2-14W8
(find it on the web at
Time Value of Money
Suppose your brother or sister owed you $500. Would you rather have this money repaid to
Chapter 12, p. 229-232
Money and Banking
Money is anything that is generally accepted in payment for goods and services.
Medium of Exchangeconvenient way to exchange for goods and services
Unit of Measurementyardstick for m
Chapter 12, p. 232-234
What "backs" Money Supply?
Money as Debt
Paper Money is the circulating debt of the Federal Reserve Banks.
Checkable Deposits are the debts of commercial banks and thrift institutions.
Neither has intrinsic valu