Chapter 13: Money, Banks & the Federal Reserve

1) medium of exchange, 2) unit of account, 3) store of value, 4) standard of deferred payment

Commodity money: a good used as money that also has value independent of its use as money (ex: cigarettes, gold coins) Fiat money: money w/o intrinsic value & used b/c of gvt decree; more stable than commodity; no value except as money (ex: US dollar)

Money: assets ppl are generally willing to accept in exchange for pymt of debts Assets: Anything of value owned by person/firm Wealth: Accumulation of Assets

Barter (good for good)

Finding someone with the same good/item that you want & they want what you have in return.

M1: includes most liquid items M2: M1 plus some less liquid items

1) Currency, all paper money & coins in circulation. In circulation: not held by banks or gvt 2) Checking Accts 3) Traveler's Checks (very small)

M1 plus SAVINGS ACCOUNT BALANCES, CD's (small time deposits), Money Market Mutual Fund Shares

1) Reserves: deposits a bank keeps as cash in its vault or on deposit w/ the Fed Reserve 2) Required Reserves: Reserves that a bank is legally req. to hold based on its checking acct balances 3) Req. Reserves Ratio (RR): Min. fraction of deposits banks are req. by law to keep as reserves 4) Excess Reserves: Reserves that banks hold over & above the legal req. (Banks loan out excess reserves & increase the MS)

Ratio of the amt of deposits created by banks to the amt of new reserves

Banking sys banks keep less than 100% of deposits as reserves

Many depositors simultaneously decide to withdraw money from a bank

Many banks simultaneously experience bank runs

Help reduce the risk of a bank panic

1) 12 District Federal Reserve Banks: each provides services for comm. banks in their region 2) Board of governors (7 members: 14 yr non-renewable term. 1 of 7 is “Chairman of the Fed”: 4 yr renewable term) 3) Federal Open Market Committee (FOMC): discusses monetary policy (12 members)