Chapter 11 – The Monetary SystemMoney vs. WealthThe set of assets that people use Total accumulation regularly to ________________. of __________. Importance of money- Without money, trade would require _____________: the ___________ of one good or service for another. - Thus every trade would require a _____________________ which is where one person is selling what you _________, and they want what you are ________________.- This would require a lot of ________________! Thus moneymakes trade ___________.- Permits_________________, facilitates ___________.4 Functions of Money1. ________________________ : an item buyers give to sellers when they want to purchase g& s.2. __________________: the yardstick people use to post prices and record debts.3. _______________________;an item people can use to transfer purchasing power from the present to the future.Many assets can take on the form of stores of value. (and most are better stores of value due to __________.) But only money can take on all 3 functions of money.Money is not a perfect store of value due to __________________.4. ___________________________________: A property of an item that makes it desirable for use as a means of settling _________________________.What is counted as money?What backs money?For commodity money it is it’s __________________.Convertible money______________________.For fiat money it is __________________.Fiduciary Monetary System– A system in which currency is issued by the ________________and its value rests on the public’s confidence that it can beexchanged for _________________________Most important property of moneyLiquidity refers to how easily an asset can be turned into a ____________.There are many ways of storing wealth… Physical Assets and financial Assets.. Which ones should be counted as money?Money supply is the quantity of money in the economyI. Transactions Approach– A method of measuring the money supply by looking at money as a medium of exchangeM1 = ________________________ + ____________________Are credit cards counted as money?II. Liquidity Approach– A method of measuring the money supply by looking at money as a ____________ store of value• Since ___________ can easily be converted to __________, manybelieve that it should be counted as ________.• M2 = __________ + __________ + _____________+_________IN CLASS PROBLEMFor each of the following transactions, what is the initial effect (increase or decrease) on M1 or M2?a. You sell a few shares of stock and put the proceeds into your savings account.b. You sell a few shares of stock and put the proceeds into your checking account.c. You transfer money from your savings account to your checking account.d. You discover $.25 under the floor mat in your car and deposit it in your checking account.e. You discover $.25 under the floor mat in your car and deposit it in your savings account.Financial System and the Banking SystemFinancial System is the group of institutions that helps match the _____________ of one personto the _________________ of Two Types of financial SystemsI. Financial Markets: institutions through which savers can ___________ provide the funds to borrowers:______________ market and ____________ MarketII. Financial __________________._______ Bank is the regulator of the commercial banks..Overview of the Fed Central bank: an institution that __________ the banking system,and _____________ the money supply (both domestically and in the foreign currency market). Federal Reserve (Fed): the central bank of the U.S.- Established in1913 by the Federal Reserve Act; signed by President Woodrow WilsonRoles of the Fed: 1) Monetary policy: the setting of the ________________by policymakers in the central bank in order to influence____________.2) The Fed regulates the _________________.3) They are Banker to ____________: meaning that they hold ___________________(known as reserves at the Fed) 4) The Fed sometimes _____________ to banks(known as Lender of Last resort).5) The Fed also acts to influence the value of the $ in the ________________.Two Mandates of the Fed:1. Keep ____________ Low!2. Keep ____________ low!Is the Fed a part of the government?The Fed is an _______________ institution meaning that they can makepolicy without ______________________.Structure of the FedI. _________________+II. ______________= III. _________________________It is the FOMC that decides on the amount of __________________.In order to explore how the Fed conducts monetary policy we need to look at the banking system in more detail.Banks affect on Money The U.S. is a Fractional reserve banking system: banks keep a _____________ of deposits as _______and use the rest to make ___________.Reserves can be held __________ or __________.  The Fed establishes reserve requirements (rr): regulations on the _______________amount of reserves that banks must hold against deposits. Required Reserves = ____ * __________ A bank usually wants to _________ their reserve holdings since they can ___________ by using their $s other ways.. Banks may hold more than this minimum amount if they choose. These are called Excess Reserves.Excess Reserves = ___________ - ____________The reserve ratio, R =When R=rr, The bank has _______ Excess Reserves and they areconsidered_____________.Bank of LaLa LandAssets LiabilitiesReserves $150 Deposits $500Loans $350What is the largest new loan that LaLa Bank can make if the rr is 10%??Effects of a Change in Deposits on the Banking SystemAssumptions:1. Reserve ratio is 10 percent2. Zero excess reserves are kept3. Transactions deposits are the bank’s only liabilities and loans are the bank’s assets4. Every time a loan is made, the proceeds are put into adeposit accountBanks T-accountSuppose that the Fed buys $100,000 of bonds from anindividual (called Open Market Operation), and this persondeposits As a result of this action Money Supply__________.Assets LiabilitiesEventually this bank will keep an extra _________ in reservesand make a loan of ________________.Assets LiabilitiesAs a result of this loan, MS_______________.When banks make loans, they_________. Round 2: This $900,000 gets deposited into another bank. If we assume that the bank quickly lends out their new excess reserves then the changes in the T-accounts would be:Assets LiabilitiesHow much does the money increase by?So far MS has increased by