Tuesday 804

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 10 Money and Prices in the Long Run
Chapter 29 of 36 The Monetary System
Section 1 of 22
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Chapter 29 topics:
The meaning of money
The functions of money
The kinds of money
Money in the U.S. economy
Credit Cards and Debit Cards
The Federal Reserve system
The Fed's organization
The Federal Open Market Committee
Banks and the money supply
The simple case of 100% reserve banking
Money creation with fractional reserve banking
The money multiplier
The Fed's tools of monetary control
Problems in controlling the money supply
Bank runs and the money supply
The Federal Funds Rate
Pros and Cons of a Return to the Gold Standard
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credit cards and debit cards
kurejittokādo to debittokādo
クレジットカードとデビットカード
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ChatGPT chapter 29 summary:
Introduction
Chapter 29 explains the nature of money, how banks create money, and how the Federal Reserve influences the money supply.
Money makes exchange easier than barter and allows a modern economy to coordinate millions of transactions.
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The Meaning of Money
Economists define money as the assets people regularly use to purchase goods and services.
Money has three main functions:
-A medium of exchange is something buyers give sellers when making purchases.
-A unit of account provides a common measure for stating prices, debts, and values.
-A store of value transfers purchasing power from the present to the future, although inflation can reduce that purchasing power.
Money is also highly liquid, meaning it can easily be used for transactions. Houses, stocks, and bonds can store value but usually must be sold before the proceeds can be spent.
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Commodity and Fiat Money
Commodity money has value apart from its use as money.
Gold, silver, and other valuable goods have historically served as money.
Fiat money has little intrinsic value but is accepted because the government recognizes it as money and people trust others will accept it.
Modern U.S. currency is fiat money.
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Measuring the Money Supply
The money supply includes more than currency.
Checking-account balances are also money because they can be used through checks, debit cards, and electronic transfers.
Different measures of money include different assets.
Narrow measures emphasize currency and checking deposits, while broader measures include savings accounts, small time deposits, and money-market accounts.
Credit cards are not money.
They allow users to borrow money temporarily and pay later.
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The Federal Reserve
The Federal Reserve, or Fed, is the central bank of the United States.
It supervises banks, promotes financial stability, and conducts monetary policy, which involves influencing the money supply and interest rates.
The Federal Open Market Committee makes major monetary-policy decisions. It includes members of the Federal Reserve Board and regional Federal Reserve Bank presidents.
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Banks and Money Creation
Banks influence the money supply because deposits are counted as money.
Reserves are deposits banks keep rather than lend.
Under 100-percent-reserve banking, banks hold all deposits and create no additional money.
Under fractional-reserve banking, banks keep only part of their deposits in reserve and lend the rest.
When a bank makes a loan, the borrower receives spendable funds while the original depositor still has a bank balance.
The banking system therefore creates money, although it does not create additional real wealth.
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The Money Multiplier
Money creation continues when loans are spent and redeposited in other banks.
Each bank keeps a fraction in reserve and lends the remainder.
The reserve ratio is the percentage of deposits banks hold as reserves.
In the simplified model, the money multiplier equals one divided by the reserve ratio.
A 10-percent reserve ratio produces a theoretical money multiplier of 10.
Actual money creation may be smaller if banks hold excess reserves or people keep more currency outside banks.
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The Fed’s Monetary Tools
The Fed’s main tool is open-market operations, the purchase and sale of government bonds.
When the Fed buys bonds, bank reserves increase, lending expands, and the money supply tends to rise.
When the Fed sells bonds, bank reserves decline, lending contracts, and the money supply tends to fall.
The Fed can also influence bank lending through the discount rate, the interest rate charged when banks borrow from the Fed.
It may also change reserve requirements, although this tool is used infrequently because sudden changes can disrupt banks.
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Limits on Monetary Control
The Fed cannot control the money supply perfectly because banks and the public make independent decisions.
Banks may choose to hold excess reserves instead of making loans.
Individuals may hold currency rather than deposit it.
These actions reduce the amount of money created from additional reserves.
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The Federal Funds Rate
The federal funds rate is the interest rate banks charge one another for short-term loans of reserves.
By buying or selling bonds, the Fed changes the supply of reserves and influences this rate.
Bond purchases generally lower the federal funds rate, while bond sales generally raise it.
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Conclusion
Money serves as a medium of exchange, unit of account, and store of value.
Banks expand the money supply through fractional-reserve lending, while the Federal Reserve influences reserves, lending, interest rates, and the total money supply.
The Fed’s control is imperfect because the behavior of banks and the public also affects how much money circulates in the economy.