Provides in depth lecture notes on the topic: The Monetary and Banking System. Includes definitions of key terms and equations of important notes for exams. Also includes a graph of an example of a T account.
What
money
is
and
why
it’s
important
●
Without
money,
trade
would
require
barter
,
the
exchange
of
one
good
or
service
for
another
●
Every
transaction
would
require
a
double
coincidence
of
wants
-
the
unlikely
occurrence
that
two
people
each
have
a
good
the
other
wants
Barter
economy
c=
commodities
commodity=
circulation
Inefficient:
->
transactions
->
cost
->
search
cost
->
opportunities
cost
of
time
●
Most
people
would
have
to
spend
time
searching
for
others
to
trade
with-
a
huge
waste
of
resources
●
This
search
is
unnecessary
with
money,
the
set
of
assets
that
people
regularly
use
to
buy
g&s
from
other
people
The
3
Functions
of
Money
●
Medium
of
exchange
:
an
item
buyers
give
to
sellers
when
they
want
to
purchase
g&s
●
Unit
of
account:
the
yardstick
people
use
to
post
prices
and
record
debts
●
Store
of
value:
an
item
people
can
use
to
transfer
purchasing
power
from
the
present
to
the
future
2
Kinds
of
Money
Commodity
money
=
takes
the
form
of
a
commodity
with
intrinsic
value
Ex:
gold
coins,
cattle,
cigarettes
in
POW
camps
Fiat
money
=
money
without
intrinsic
value,
used
as
money
because
of
government
decree
Ex:
the
U.S.
dollar
The
Money
Supply
●
The
money
supply
(or
money
stock
)=
the
quantity
of
money
available
in
the
economy
●
The
assets
that
make
up
the
money
supply
are:
○
currency
=
the
paper
bills
and
coins
in
the
hands
of
the
(non-bank)
public
○
Demand
deposits
=
balances
in
bank
accounts
that
depositors
can
access
on
demand
by
writing
a
check
M1:
currency,
demand
deposits,
traveler’s
checks,
and
other
checkable
deposits M1=
CC
+
DD
+
TC
+
OCD
M2:
everything
in
M1
plus
savings
deposits,
small
time
deposits,
money
market
mutual
funds,
and
a
few
minor
categories
M2=
M1
+
SD
+
STD
+
MMMF
Central
Banks
and
Monetary
Policy
Central
bank:
an
institution
that
oversees
the
banking
system
and
regulates
the
quantity
of
money
in
the
economy
Monetary
policy:
the
setting
of
the
money
supply
by
policymakers
in
the
central
bank
Federal
reserve
(Fed):
central
bank
of
the
United
States
●
Created
in
1913
after
a
series
of
bank
failures
in
1907
●
Purpose:
to
ensure
the
health
of
the
nation’s
banking
system
The
Fed’ s
Organization
●
Board
of
governors
○
7
members,
14-year
terms
○
Appointed
by
the
president
and
confirmed
by
the
Senate
●
The
chairman:
Jerome
Powell
○
Directs
the
Fed
staff
○
Presides
over
board
meetings
○
Testifies
regularly
about
Fed
policy
in
front
of
congressional
committees
○
Appointed
by
the
president
(4-year
term)
●
The
Federal
Reserve
system
○
Federal
Reserve
Board
in
Washington,
DC
○
12
regional
Federal
Reserve
Banks
■
Major
cities
around
the
country
■
The
presidents
are
chosen
by
each
bank’s
board
of
directors
●
The
Fed’s
jobs
○
Regulate
banks
and
ensure
the
health
of
the
banking
system
■
Regional
Federal
Reserve
Banks
■
Monitors
each
bank’s
financial
condition
■
Facilitates
bank
transactions-
clearing
checks
■
Acts
as
a
bank’s
bank
■
The
fed-
lender
of
last
resort
○
Control
the
money
supply
■
Quantity
of
money
available
in
the
economy
■
Monetary
policy:
through
the
Federal
Open
Market
Committee
(FOMC)
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