Professional Documents
Culture Documents
By
Karl E. Case,
Ray C. Fair &
Sharon M. Oster
2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
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Prepared by:
Fernando & Yvonn Quijano
2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
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11
CHAPTER OUTLINE
An Overview of Money
What Is Money?
Commodity and Fiat Monies
Measuring the Supply of Money in the
United States
The Private Banking System
How Banks Create Money
A Historical Perspective: Goldsmiths
The Modern Banking System
The Creation of Money
The Money Multiplier
The Federal Reserve System
Functions of the Federal Reserve
The Federal Reserve Balance Sheet
How the Federal Reserve Controls the
Money Supply
The Required Reserve Ratio
The Discount Rate
Open Market Operations
The Supply Curve for Money
Looking Ahead
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An Overview of Money
What Is Money?
Money is anything that is generally accepted as a
medium of exchange.
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An Overview of Money
What Is Money?
A Store of Value
store of value An asset that can be used to
transport purchasing power from one time period
to another.
liquidity property of money The property of
money that makes it a good medium of exchange
as well as a store of value: It is portable and
readily accepted and thus easily exchanged for
goods.
A Unit of Account
unit of account A standard unit that provides a
consistent way of quoting prices.
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An Overview of Money
Dolphin Teeth
as Currency
Shrinking Dollar Meets Its
Match In Dolphin Teeth
Wall Street Journal
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An Overview of Money
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An Overview of Money
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An Overview of Money
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An Overview of Money
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An Overview of Money
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FIGURE 25.3 The Creation of Money When There Are Many Banks
In panel 1, there is an initial deposit of $100 in bank 1. In panel 2, bank 1 makes a loan of $80 by creating a
deposit of $80. A check for $80 by the borrower is then written on bank 1 (panel 3) and deposited in bank 2
(panel 1). The process continues with bank 2 making loans and so on. In the end, loans of $400 have been
made and the total level of deposits is $500.
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money multiplier
1
required reserve ratio
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Gold
Loans to banks
U.S. Treasury
securities
Liabilities
11,037
$776,701
502
Deposits:
779,574
21,107
4,737
93,860
82,428
$ 884,973
$884,973
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Commercial Banks
Liabilities
$200
Assets
$100
Reserves
Reserves
$100
$100
Currency
Loans
$400
Liabilities
$500
Deposits
$200
Commercial Banks
Liabilities
Assets
Liabilities
$100
Reserves
Reserves
$100
$800
$100
Currency
Loans
(+ $300)
$700
(+ $300)
Deposits
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$160
Commercial Banks
Assets
Liabilities
$80
Reserves
Reserves
$80
Currency
Loans
$80
$400
Deposits
$320
Commercial Banks
Assets
Liabilities
$160
$100
Reserves
(+ $20)
Reserves
(+ $20)
$100
$500
$20
$80
Currency
Loans
(+ $100)
$420
$20
Deposits
(+ $300)
Amount owed to
Fed (+ $20)
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Panel 1
Federal Reserve
Assets
Liabilities
Securities
$100
$20 Reserves
$80 Currency
Commercial Banks
Assets
Liabilities
Reserves
Loans
$20
$80
$100 Deposits
Jane Q. Public
Assets
Liabilities
Deposits
$5
$0
$5
Debts
Net Worth
Panel 2
Federal Reserve
Assets
Liabilities
Securities
( $5)
$95
$15 Reserves
( $5)
$80 Currency
Commercial Banks
Assets
Liabilities
Reserves
( $5)
Loans
$15
$95 Deposits
( $5)
$80
Jane Q. Public
Assets
Liabilities
Deposits
( $5)
Securities
(+ $5)
$0
$0
Debts
$5
$5
Net Worth
Panel 3
Federal Reserve
Assets
Liabilities
Securities
( $5)
$95
$15 Reserves
( $5)
$80 Currency
Commercial Banks
Assets
Liabilities
Reserves
( $5)
Loans
( $20)
$15
$60
$75 Deposits
( $25)
Jane Q. Public
Assets
Liabilities
Deposits
( $5)
Securities
(+ $5)
$0
$0
Debts
$5
$5
Net Worth
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moral suasion
commodity monies
near monies
currency debasement
discount rate
excess reserves
reserves
run on a bank
store of value
unit of account
1. M1 currency held outside banks + demand
deposits + travelers checks + other checkable
deposits
2. M2 M1 + savings accounts + money market
accounts + other near monies
3. Assets liabilities + capital (or net worth)
4. Excess reserves actual reserves required
reserves
1
5. Money multiplier required reserve ratio
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