PART 4. THE MONEY ECONOMY. 11. Money and the Monetary System. CHAPTER. 1. 2. 3. C H A P T E R C H E C K L I S T. When you have completed your study of this chapter, you will be able to. Define money and describe its functions.
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THE MONEY ECONOMY
Money and the Monetary System
Figure 11.1 shows what happens when a person pays by writing a check.
Initially, Colleen has $500 in her bank account;
Rocky’s Rollers has $3,000 in its bank account.
Colleen buys some inline skates for $200 and writes a check to pay for them.
Colleen’s bank account balance decreases by $200.
Rocky’s bank account balance increases by $200.
The bank deposits are money,
but the check is not money.
Figure 11.2 shows two measures of money.
Figure 11.3 shows the changing composition of money in theUnited States.
Currency, as a percentage of M2, decreased between 1960 and 1986 but increased during the 1990s.
The percentage of M2 held as checkable deposits decreased but increased temporarily during the mid-1990s.
The other components of M2 have increased.
Figure 11.4 shows the institutions of the monetary system.
The Federal Reserve regulates and influences the activities of the commercial banks, thrift institutions, and money market funds, whose deposits make up the nation’s money.
The banks’ cash assets were $350 billion,
interbank loans were also $250 billion,
bonds were $2,000 billion,
and loans were $2,900 billion.
Figure 11.7 shows the Federal Reserve districts.
The nation is divided into 12 Federal
Reserve districts, each with a
Federal Reserve Bank.
The Board of Governors of the Federal Reserve System is
located in Washington, D.C.
An open market operation is the purchase or sale of government securities by the Federal Reserve in the open market.
When the Fed conducts an open market operation, the Fed does not transact with the federal government.
Figure 11.8 shows the monetary base and its composition.
The monetary base is the sum of coins, Federal Reserve notes (bills), and banks’ deposits at the Fed.
Most of the monetary base consists of
Federal Reserve notes.
Imagine a world without money! A world in which you must barter for everything you buy.
What kind of items would you have available for these trades?
Would you keep some stocks of items that you know lots of people are willing to accept?
Would you really be bartering, or would you be using a commodity as money?
How much money do you have in your pocket or purse?
How much money do you have in the bank?
Of the money you are holding, which items are part of M1? M2? Are all the items a means of payment?