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Representative Bank Assets

Cash (in the vault, in the ATM, etc)
Deposits at the federal reserve
government securities
other assets (value of building and capital)

Representative Bank Liabilities

DDO- demand deposit and other checkable accounts
time and savings accounts
other liabilities (money borrowed from other banks for capital)
capital accounts- shareholder's money and actual value of the bank

Business of a Bank

financial intermediary that takes money from lenders and loans it to borrowers

Required Reserves

the Fed requires banks to keep a certain percentage of their cash and deposits in the Fed- the percentage amount is based on the banks' liabilities

Excess Reserves

all of the money that is not sent to the fed- the banks will make loans with this so as to earn interest

FED Assets

coins- the FED buys them with the notes they make
loans to financial institutions (number is big because of banking bailout in 2009)
government securities- the FED buys securities from banks and they can gain interest on them and help fund the federal government

FED Liabilities

federal reserve notes- issued paper money
Deposits of Financial Institutions-
Deposits of US Treasury-
capital account

functions of money

medium of exchange
unit of account
store of value

medium of exchange

money allows society to escape complications associated with barter

unit of account

money measures the relative net worth of a variety of g/s

store of value

transfers purchasing power from the present to the future
assigns a value to things


the ease with which a thing can be converted and accepted with little or no loss of purchasing power


Currency in the hands of the public and DDO
does not include currency held by the FED, US treasury, or commercial banks. also checkable deposits of the government held by banks


M1+Savings Deposits+Small Time Account+Money market Mutual Fund (assortment of stocks through a company)

Usefulness of Money

Acceptability- currency and DDO are accepted as a fair medium of exchange (if PL increases exponentially, businesses may not choose to accept it)
Legal Tender- money is backed by the government
Relative Scarcity- money holds value

Setup of the Fed

led by a board of governors appointed by the president and who have long terms so they are more independent of the politicians in power
12 federal banks that are owned by the banks in its district but controlled by the BOG

Federal Open Market Committee

aids the board of governors in conducting monetary policy
directs the sale and purchase of government securities in the open market

Fractional Reserve System

in this system, banks can create money through lending
banks do not have all of the money in their vault at one time- however, the FED offers deposit insurance

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