Economics Chapter 9: What Money is Good For
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Terms to Know:
Section 1: The Three Functions of Money
- Money is anything that is generally accepted as a means of payment.
The Three Main Functions of Money:
- (1) To be a medium of exchange
- (2) To provide a measure of value
- (3) To provide a store of value
Bartering
- Bartering is the direct exchange of one good for another good without a standard form of money passing from hand to hand.
The Six Characteristics of Money:
- Portability
- Durability
- Homogeneity
- Divisibility
- Constancy
- Intrinsic valuableness
Section 2: Metallic Money
- Inflation is when the level of prices in the market rises because too much money is in circulation.
- Deflation when prices decrease because money seems more valuable and stable.
Section 3: Paper Money
- Legal tender is any form of money that has been declared a valid means of payment.
- Bullion is gold, silver, or platinum.
- Fractional reserve banking is a system which allows banks to hold less than 100 percent of deposits in reserve.
- Fiat money is legal tender that is backed by nothing but a government's promise.
Section 4: Money Supply
- Near-monies are assets can be easily converted into M1 because they are highly liquid.
Section 5: The Treasury, Federal Reserve, & Commercial Banks
- The United States Department of the Treasury is the source of part of the American money supply.
- The majority of America's money supply is under the control of the central banking network of the Federal Reserve.
- Members of the Federal Reserve's Board of Governors operate America's banking system.
- The Federal Open Market Committee (FOMC) makes decisions regarding the buying and selling of government securities, such as Treasury notes, bills, and bonds.
- The Federal Reserve Banks influence the policies of private commercial banks.
The Three Main Tools of the Federal Reserve
- (1) Open Market Operations
- (2) Reserve Ratios
- (3) Discount Rates
Recession and Monetarism
- A recession is a period of six months or longer which the economy recedes or declines.
- Monetarism is the theory that variation in the money supply is the main source of economic fluctuations, including growth and recessions.