Unit 3 Review: Money, Banking, and Monetary Policy

Barter

The exchange of goods and services without using money.

Inefficient Barter

Inefficient due to the need for a double coincidence of wants.

Barter

The exchange of goods and services without using money.

Inefficient Barter

Inefficient due to the need for a double coincidence of wants.

M1

Includes the most liquid forms of money.

M1 Components

Currency (cash & coins), Demand deposits (checking accounts), Traveler's checks.

M2

Includes everything in M1 plus less liquid forms of money.

M2 Components

Savings accounts, Time deposits (CDs), Money market accounts.

Functions of Money

Medium of Exchange, Unit of Account, Store of Value.

Medium of Exchange

Used to buy and sell goods and services.

Unit of Account

A standard measure of value for pricing goods and services.

Store of Value

Retains value over time, allowing you to save and spend later.

Demand Deposits

Bank account funds that can be withdrawn on demand without prior notice.

Depository Institutions

Financial institutions that accept deposits from customers.

Examples of Depository Institutions

Commercial banks, credit unions, savings banks.

Non-Depository Institutions

Institutions that offer financial services but do not accept deposits.

Examples of Non-Depository Institutions

Insurance companies, pension funds, mutual funds.

Federal Reserve (Fed)

The central bank of the United States.

Functions of the Federal Reserve

Issues the U.S. currency (Federal Reserve Notes), Regulates monetary policy and supervises banks.

Monetary Policy

Actions taken by the Fed to control the money supply and interest rates.

Expansionary Policy

Increases the money supply, Lowers interest rates, Stimulates spending and economic growth.

Contractionary Policy

Decreases the money supply, Raises interest rates, Slows down inflation and economic activity.

Inflation

A general increase in prices over time, reducing the purchasing power of money.

Hyperinflation

Extremely rapid and out-of-control inflation.

Deflation

A general decrease in prices, increasing the purchasing power of money.

Stagflation

A combination of stagnant economic growth, high unemployment, and high inflation.

Investments

Allocation of money with the expectation of generating income or profit.

Examples of Investments

Stocks, bonds, real estate.

Assets

Anything of value owned by an individual or institution.

Examples of Assets

Cash, property, investments.

Liabilities

Debts or financial obligations.

Examples of Liabilities

Loans, mortgages, accounts payable.

Major Functions of Money

Medium of exchange, unit of account, and store of value.

M1

M1 = cash + demand deposits.

M2

M2 = M1 + savings and time deposits.

Scarcity

Limited supply.

Durability

Long-lasting.

Portability

Easy to carry.

Divisibility

Easily divided into smaller units.

Acceptability

Widely accepted in exchange.

Federal Reserve System

Central bank issuing Federal Reserve Notes.

Bank Run

A rush of depositors withdrawing funds, causing bank collapse.

Glass-Steagall Act (1933)

Separated commercial and investment banking to prevent risky speculation.

Deregulation (1980s)

Led by Ronald Reagan, reduced regulations on banks, allowing for more competition and risk-taking.

Inflation

Rising prices.

Deflation

Falling prices.

Creeping Inflation

Low, gradual inflation.

Walking Inflation

Moderate inflation.

Galloping Inflation

Rapid inflation.

Hyperinflation

Uncontrollable inflation.

Causes of Inflation

Increased demand, rising production costs, excessive money supply.

FOMC

Sets monetary policy, controls open market operations.

District Banks

12 regional banks, implement Fed policies.

Member Banks

Private banks regulated by the Fed.

Board of Governors

7 members, oversee Fed operations.

Current Chairman

Jerome Powell (as of 2025).

Past Chairmen

Ben Bernanke, Janet Yellen.

Conducting Monetary Policy

Control money supply.

Regulating and Supervising Banks

Ensure financial stability.

Maintaining Financial Stability

Prevent bank runs.

Providing Financial Services

Handle payments and distribute currency.

Open Market Operations (OMO)

Buying bonds → Increases money supply → Lowers interest rates.

Selling Bonds

Decreases money supply → Raises interest rates.

Discount Rate

Lowering the rate → Increases lending → Expands money supply.

Raising the Discount Rate

Reduces lending → Contracts money supply.

Reserve Requirements

Lowering requirements → Banks lend more → Expands money supply.

Raising Reserve Requirements

Banks lend less → Contracts money supply.