Chapter 8 Money the Price Level and Inflation

  1. Functions of money
    • Medium of exchange
    • Unit of account
    • Store of value
  2. Medium of exchange
    Eliminates double coincidence of wants, or barter.
  3. Unit of Account
    An agreed measure for stating the prices of goods and services
  4. Store of value
    It can be held and exchanged for later goods and services

    Food is not a good store of value because it rots

    Inflation lowers the value of money over time
  5. Depository Institutions
    • Commercial Banks
    • Thrift Institutions
    • Money market mutual funds
  6. Depository Institution Benefits
    • Create Liquidity - get money when I want
    • Pool Risk - one mistake spread over many ppl
    • Lower cost of borrowing - spread cost of activity
    • Lower cost of monitoring borrowers
  7. A commercial bank puts the depositors’ funds into four types of assets:
    • Reserves
    • Liquid assets
    • Securities 
    • Loans
  8. Reserves
    Notes and coins in depository institutions vault or its deposit at the Federal Reserve
  9. Liquid assets
    U.S. government Treasury bills and commercial bills

    Can be sold and instantly converted into reserves with no risk
  10. Loans
    Commitments of fixed amounts of money for agreed-upon periods of time
  11. Financial innovation
    The development of new financial products with the goal to lower the cost of deposits or to increase the return from lending
  12. Federal Reserve System
    Central bank of the US.

    A bank's bank and public authority that regulates a nation's depository institutions and conducts monetary policy

    Adjusts quantity of money in circulation and influences interest rates
  13. Fed Structure
    • Board of Governors
    • The regional Federal Reserve banks
    • The Federal Open Market Committe
  14. The Board of Governors
    • 7 members
    • Appointed by the President 
    • 14 year terms (staggered) one seat becomes available every 2 years
  15. The Federal Open Market Committe
    Main policy making group
  16. Fed's assets
    • 1. US government securities
    • 2. Loans to depository institutions
  17. Fed's Liabilities
    • 1. Federal Reserve notes in circulation (MONEY in my pocket)
    • 2. Depository institution deposits
  18. Monetary base
    Sum of the Federal Reserve notes, coins, and depository institutions' deposits at the Fed
Card Set
Chapter 8 Money the Price Level and Inflation
ECON 202