Download Ch13-- Money and Banking

Money and Banking
“Money is whatever is generally accepted in
exchange for goods and services—accepted
not as an object to be consumed but as an
object that represents a temporary abode of
purchasing power to be used for buying still
other goods and services.”
-- Milton Friedman
What is Money?
__________is anything that is
generally acceptable to sellers in
exchange for goods and services.
A __________ __________ is an asset
that can easily (i.e., quickly, cheaply,
conveniently) be exchanged for
goods and services.
What is Money?
Functions of Money
1) __________ of exchange
2) Unit of __________
3) Store of __________
4) Standard of Deferred __________
Medium of Exchange (1)


The use of money as a __________ of
__________(to make transactions) lowers
transactions costs.
Trade without money, directly exchanging
goods for goods, is called __________.
–
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Barter requires a __________ __________ of
__________—each party to the exchange has
to want what the other has to trade.
Finding someone else who wants what you
have to trade and who has what you want is
time-consuming and costly.
Medium of Exchange (2)

A medium of exchange must be:
–
–
–
__________ __________ for __________
__________ : easy to transport and
transfer to the seller
__________ : measurable in both small
and large units
Unit of Account
Money acts as a common unit of
measurement.
 This allows us to compare the values
of very dissimilar things.
 It makes accounting possible.
 As a result of these things, it lowers
information costs.

Store of Value


Money makes it possible to carry buying power
forward into the future.
Therefore, for money to be a store of value, it
must be __________.
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–
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__________ is the ability to retain value over time.
__________ can reduce the effectiveness of money as a
store of value.
This can lead to __________ __________—the use of
foreign money as a substitute for domestic money when
the domestic economy has a high rate of inflation.
Standard of Deferred Payment



Debt is denominated in money terms.
The __________ for __________ is money.
There is a difference between __________
and __________ :
–
–
–
__________ is what you use to pay for goods
and services.
__________ is available savings that are lent to
borrowers to spend.
__________ is __________, something you
owe.
M1 Money Supply
Money in the United States Today
consists of:
–
–
__________ is the bills and coins that
we use.
__________ are also money because
they can be converted into currency and
are used to settle debts.
What is Money?—M1

M1 is the narrowest and most liquid measure of
the money supply.
–

M1 includes:
–
–
–
–

It includes financial assets that are immediately
available for spending on goods and services.
__________
__________ Checks
__________ __________(checking accounts)
Other __________ __________(interest-bearing
checking)
Demand Deposits and Checkable Deposits are
called __________ __________ are checking
accounts that can be drawn upon to make
payments.
U.S. Money Supply: M1
About Currency


In 2003, currency was 52% of M1.
U.S. currency today is __________ backed
by gold or silver.
–
–

It is backed only by the confidence and trust of
the public.
It is a __________ monetary system. (“Fiducia”
means “trust” in Latin.)
Money backed by gold or silver (or
something else of value) is called
__________ __________.
Problems with Commodity Money

At times, the precious metal in gold or
silver coins may be worth more than the
face value of the coins.
–
In such situations, the public will begin to
hoard the coins.
What is Money?—M2
M2 __________ to M1 less liquid assets
that can be converted to M1 assets
quickly and at low cost.
 Includes everything in M1
 Adds:

–
–
–
__________ __________
Small denomination time deposits
(__________)
Retail money market __________
__________
U.S. Money Supply: M2
U.S. Money Supply: M3
Financial Intermediaries
__________ __________ are firms that
take deposits from households and
firms and make loans to other
households and firms.
Financial Intermediaries
Four Types of Financial Intermediaries
1) __________ banks
2) __________ and __________
__________
3) __________ banks and __________
unions
4) __________ __________ __________
__________
Financial Intermediaries

__________ __________
–
–
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Financial institutions that offer deposits on which
checks can be written. The make loans to households
and businesses. They are corporations.
Originally only commercial banks could offer (noninterest-bearing) checking accounts.
__________ __________
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–
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Savings and Loan Associations, Credit Unions, Mutual
Savings Banks.
Created to encourage saving, hence “thrift”.
Until 1980, these institutions could offer higher interest
rates on savings accounts than banks.
Now “thrifts” can offer many of the same services as
commercial banks.
U.S. Depository Institutions
Deposit Insurance


A bank panic occurs when depositors, fearing
a bank’s closing, rush to withdraw their funds.
To reduce the likelihood of bank panics, in
1933 the __________ __________ __________
__________(FDIC) was created.
–
This is a federal agency that insures bank deposits
so that depositors do not lose their deposits if a
bank fails.
Bank Failures