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ECON 20B (45)
Chapter 29

Ch. 29 The Monetary System.docx

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Mu- Chun Chen

Ch. 29 The Monetary System I. Meaning of Money - money: set of assets in an economy that people regularly use to buy goods and services from others A. Functions of money 1. medium of exchange 2. unit of account 3. store of value - wealth: monetary and nonmonetary assets - liquidity: asset can be converted into econ’s medium of exchange o money most liquid o paintings, cards, house are less liquid B. Kinds of money - commodity money: money with intrinsic value o gold, cigar - fiat money: money without intrinsic value b/c no government decree o monopoly money C. Money in the U.S. Economy - money stock: money circulating in the economy - currency: paper bills and coins in the hands of the public - demand deposits: balances in bank accounts that depositors can access on demand by writing a check or swipe card - much of the currency is held by abroad, drug dealers, tax evictors, criminals II. Federal reserve system - federal reserve: central bank of U.S. - central bank: institution oversees bank systems and regulate quantity of money in economy - A. Fed’s Organization - regulate banks - lender of last resort - controls quantity of money - money supply: quantity of money available in econ. - Monetary policy: setting of the money supply by policy members in the central bank B. Federal Open Market Committee ( FOMC) -Has power to increase or decrease # of money in econ -Open market operation: purchase and sale of U.S. government bonds -Short run tradeoff between inflation and unemployment III. Banks and the money supply A. 100% reserve banking - reserves: deposits banks received but not loaned out - T-account: accounting statement showing changes in bank’s assets and liabilities  balance sheet
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