Chapter 14 Money and Our Banking System

Money is whatever people generally accept Functions of Money Medium of Exchange – payment for goods and services Barter – trading a good for a good Coincidence of wants Reduces transactions costs Unit of Account – allows us to compare values Liquidity – ease at which something can be converted into cash What backs our money? Nothing Fiduciary Monetary System – based on the public’s faith that the currency can be exchanged for goods Currency and checkable deposits Fiat Money – not backed by anything

Depository institutions – accepts deposits from savers and lends to borrowers Banks Savings and Loans Credit Unions Money Supply – Money in circulation M1 = Currency (bills and coins) + Checking deposits + Traveler’s checks M2 = M1 + Savings deposits + Money Market Deposit accounts + Small time deposits + Money Market Mutual Funds Savings deposits – interest bearing savings accounts Small denomination time deposits – less than $100,000 with maturity dates Money market mutual funds – pools of funds used to buy short term financial assets

Federal Reserve System (FED) 1913 – central bank of the US Organization Board of Governors – 7 appointed by the President and approved by the Senate to 14 year terms 12 District banks Federal Open Market Committee – determines our money supply 7 Board of Governors New York District Bank president 4 other district bank presidents (rotating) Functions Regulates the Money Supply Monetary Policy Supplies economy with paper currency and coins Provides check clearing and collection Supervises banks Holds reserves of financial depository institutions Bank’s bank U.S. Government’s bank

Money Creation, Reserves and the Money Multiplier Fractional Banking System Reserve requirement – percentage of deposits that can not be loaned held in FED or their own vaults 10% Expanding the Money Supply Excess reserves – funds that can be loaned Money Multiplier = 1 / rr rr = reserve requirement Example E – Money Smart Cards – electronic cash cards Debit cards Store specific cards