Ch 16: The Monetary System
Money - set of assets in the economy that people regularly use to buy goods and services
from each other!
Functions of Money
- medium of exchange: commonly accepted; an item that buyers give to sellers when
purchases are made!
- unit of account: measure and record economic value; used to post prices and record debts!
- store of value: used to transfer purchasing power from the present to the future (stocks and
bonds)!
"wealth: total of all stores of value, including both money and non monetary assets!
liquidity: how quickly an asset can be converted into the economy’s medium of exchange!
"* cash/currency: most liquid asset!
Kinds of Money
-commodity money: money with intrinsic value!
-intrinsic: value exist even if it were not used as money!
-gold!
-fiat money: money without intrinsic value!
-order or decree!
-real money vs monopoly money!
-dollar bills have value because the government stands behind them!
Money in the U.S. Economy!
"- money stock: quantity of money circulating in the economy!
" " includes…!
"""- currency: paper bills and coins!
"""- demand deposits: balances in bank accounts that depositors can " "
""""access on demand by writing a check or swiping a debit card!
M1!
"- currency!
"- demand deposits!
"- traveler’s checks’!
"- other checkable deposits!
M2!
"M1 + …!
"- saving deposits!
"- small time deposits!
"- money marker mutual funds!
"- a few minor categories!
"!
The Federal Reserve System: central bank to oversee the baking system and regulate the " "
"""""quantity of money in the economy!
" " - independent policymaking body: members of the board of governors are " "
"""""""appointed for 14 year terms !
" " - 12 Regional Federal Reserve Banks!
"Function…!
•regulate banks !
•ensure the health of the banking system!
•bank’s bank - makes loans to banks when banks want to borrow" " - !