Of 33 PART V The Core of Macroeconomic Theory © 2012 Pearson Education, Inc. Publishing as Prentice Hall Prepared by: Fernando Quijano & Shelly Tefft CASE.

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CASE FAIR OSTER

P R I N C I P L E S O F

ECONOMICST E N T H E D I T I O N

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CHAPTER OUTLINE

25The Money Supply and the Central Bank

An Overview of Money What Is Money?Commodity and Fiat MoniesMeasuring the Supply of Money in the United StatesThe Private Banking System

How Banks Create MoneyA Historical Perspective: GoldsmithsThe Modern Banking SystemThe Creation of MoneyThe Money Multiplier

The Federal Reserve SystemFunctions of the Federal ReserveExpanded Fed Activities Beginning in 2008The Federal Reserve Balance Sheet

How the Federal Reserve Controls the Money Supply

The Required Reserve RatioThe Discount RateOpen Market OperationsExcess Reserves and the Supply Curve for Money

Looking Ahead

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Money is a means of payment, a store of value, and a unit of account.

barter The direct exchange of goods and services for other goods and services.

medium of exchange, or means of payment What sellers generally accept and buyers generally use to pay for goods and services.

An Overview of Money

What Is Money?

A Means of Payment, or Medium of Exchange

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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.

unit of account A standard unit that provides a consistent way of quoting prices.

An Overview of Money

What Is Money?

A Store of Value

A Unit of Account

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commodity monies Items used as money that also have intrinsic value in some other use.

fiat, or token, money Items designated as money that are intrinsically worthless.

legal tender Money that a government has required to be accepted in settlement of debts.

currency debasement The decrease in the value of money that occurs when its supply is increased rapidly.

An Overview of Money

Commodity and Fiat Monies

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In most countries commodity monies are not used anymore, but the world is a big place and there are exceptions.

In the Solomon Islands, dolphin teeth are being used as a means of payment and a store of value.

Note that even with a currency like dolphin teeth there is a concern about counterfeit currency, namely fruit-bat teeth, but also tooth decay.

Dolphin Teeth as Currency