13| Money, Banks, and the
Federal Reserve System
Brief Chapter Summary
13.1 What Is Money, and Why Do We Need It? (pages 422–425)
Money is anything that people are generally willing to accept in exchange for goods or services or in payment of debts. Money has four functions: a medium of exchange, a unit of account, a store of value, and a standard of deferred payment.
13.2 How Is Money Measured in the United States Today?
The narrowest definition of the money supply in the United States today is M1, which includes currency, checking account balances, and traveler’s checks.
13.3 How Do Banks Create Money? (pages 429–436)
The key role that banks play in the economy is to accept deposits and make loans. By …show more content…
Americans are used to paper money and have little experience with money in any other form. Paper money is used because it meets the five criteria that make any good suitable as a medium of exchange. Paper money is 1. acceptable to most people 2. of standardized quality 3. durable 4. valuable relative to its weight 5. divisible Other commodities have served as money, including animal skins. The following is a list of prices for goods supplied to an Indian tribe in upstate New York in 1703. Item One yard of broadcloth Two yards of cotton Five pecks of corn Two pints of powder Ten pounds of pork Price 3 beaver skins 1 beaver skin 1 beaver skin 1 beaver skin 1 beaver skin
One hat with hatband One shirt One sword blade Six knives
Source: Hudson Historical Bureau.
3 beaver skins 1 beaver skin 1 ½ beaver skin 1 beaver skin
a. What function of money does this list demonstrate? b. Why were animal skins used as money in the 18th …show more content…
Traditionally, when a bank made a residential mortgage loan to a household to buy a home or made a commercial loan to a business, the bank would keep the loan and collect the payments until the loan was paid off. A financial asset – such as a stock or bond – that can be bought and sold in a financial market is a security. When a financial asset is first sold, the sale takes place in a primary market. Subsequent sales take place in a secondary market. After 1970, loans began to be securitized. Securitization is the process of transforming loans or other financial assets into securities. The financial system was also transformed in the 1990s and 2000s by the increasing importance of nonbank financial firms, such as investments banks. Investment banks concentrate on providing advice to firms issuing stocks and bonds and considering mergers with other firms. In the 1990s investment banks began bundling large numbers of their mortgages and reselling them to investors. Mortgage-backed securities became popular because they often paid higher interest rates than other securities. Money market mutual funds sell shares to investors and use the money to buy short-term securities. Hedge funds raise money from