Chapter 29

Chapter 29 talks about the monetary system. Money is the set of assets in the economy that people regularly use to buy goods and services from other people. Money has three functions in the economy: medium of exchange, unit of account, and a store value. Commodity and fiat are two kinds of money. Intrinsic value means that the item would have value even if it were not used as money. Money stock for the US economy includes currency and deposits in banks/other financial institutions that can be easily accessed to buy goods and services. The Federal Reserve was created in 1913 to ensure the health of the nation's banking system. The Federal Reserve System is made up of the Federal Reserve Board in D.C. and twelve regional Federal Reserve Banks across the country. The Fed has two jobs: regulating the banks/ ensuring the health of the banking system and controlling the quantity of money that is made available. The second job is considered more important than the first. Deposits that banks have received but have not loaned out are called reserves. Since all deposits are help as reserves, in this imaginary economy, the system is called 100 percent reserve banking. When banks hold only a fraction of deposits in reserve, banks create money. The money multiplier is the reciprocal of the reserve ratio. The higher the reserve ratio, the less of each deposit banks loan out, and the smaller the money multiplier. If banks hold all deposits in reserve, banks do not influence the supply of money. The Fed has three tools in its monetary toolbox: open-market operations (buying/selling government bonds), reserve requirements, and the discount rate. The problems with the Fed's three tools are that the Fed doesn't control the amount of money that households choose to hold as deposits in banks and that it doesn't control the amount that bankers choose to lend.