Chapter 31 - Money and the monetary system. In this chapter you will learn: What the main functions of money are and what makes something a good choice for money? How to explain the concept of fractionalreserve banking and the money multiplier? What role the central bank plays and what the Federal Reserve’s (Fed) dual mandate is?. | Chapter 31 Money and the Monetary System © 2014 by McGraw-Hill Education 1 What will you learn in this chapter? • What the main functions of money are and what makes something a good choice for money. • How to explain the concept of fractionalreserve banking and the money multiplier. • What role the central bank plays and what the Federal Reserve’s (Fed) dual mandate is. • How the Fed conducts monetary policy. • How monetary policy affects interest rates, the money supply, and the broader economy. © 2014 by McGraw-Hill Education 2 What is money? Functions of money • Money is the set of all assets that are regularly used to directly purchase goods and services. • Money serves three main functions: 1. Store of value: Money represents a certain amount of purchasing power. 2. Medium of exchange: Money can be used to purchase goods and services. – A barter system is where people directly offer a good or service for another good or service. 3. Unit of account: Money provides a standard unit of comparison. © 2014 by McGraw-Hill Education 3 1 What makes for good money? • There are two basic considerations that make certain money better than others. • Stability of value: – Early versions of money generally took the form of a physical material that was durable and had intrinsic value. – Money does not need intrinsic value to maintain stability. • Convenience: – Technology has allowed for the development of more convenient forms of money. • For example, paper money is more convenient than gold coins. © 2014 by McGraw-Hill Education 4 Commodity-backed money versus fiat money • Any form of money that can be legally exchanged into a fixed amount of an underlying commodity is commodity-backed money. – The most common underlying commodity is gold. • Money created by rule, without any commodity backing it, is fiat money. – . currency is backed only by the trust that the government will keep the value of money relatively constant. © 2014 by McGraw-Hill .
