* Money serves three basic functions:
1. Medium of exchange: because you can use it to buy the goods and services you want, everyone’s willing to trade things for money. 2. Measure of value: it simplifies the exchange process because it’s a means of indicating how much something costs. 3. Store of value: people are willing to hold onto it because they’re confident that it will keep its value over time. * The government uses two measures to track the money supply: M-1 includes the most liquid forms of money, such as cash and checking-account funds. M-2 includes everything in M-1 plus near-cash items, such as savings accounts and time deposits below $100,000.
* Financial institutions serve as financial intermediaries between savers and borrowers and direct the flow of funds between the two groups. * Those that accept deposits from customers—depository institutions—include commercial banks, savings banks, and credit unions; those that don’t—nondepository institutions—include finance companies, insurance companies, and brokerage firms. * Financial institutions offer a wide range of services, including checking and savings accounts, ATM services, and credit and debit cards. They also sell securities and provide financial advice. * A bank holds onto only a fraction of the money that it takes in—an amount called its reserves—and lends the rest out to individuals, businesses, and governments. In turn, borrowers put some of these funds back into the banking system, where they become available to other borrowers. The money multiplier effect ensures that the cycle expands the money supply.
* Most large banks are members of the central banking system called the Federal Reserve System (commonly known as “the Fed”). * The Fed’s goals include price stability, sustainable economic growth, and full employment. It uses monetary policy to regulate the money supply and the level...