Money

1. Functions of money

• medium of exchange (liquidity)
• unit of account
• store of value

2. Types of money

• commodity money
• fiat money

3. Money stock

• M1 = currency + demand deposits + traveler's checks + other checkable deposits
• M2 = M1 + savings deposits + small time deposits + money market mutual funds + etc

4. The Federal Reserve System

• Central Bank of the U.S.
• Created in 1913
• Organization:
1. Board of Governors (7, appointed for 14 year terms)
2. Chair (appointed for a 4 year term)
3. 12 Regional Federal Reserve Banks - regulate banks and ensure the health of the banking system, lender of last resort via the discount window
4. Federal Open Market Committee - control the money supply with monetary policy, comprised of the Board of Governors and 5 regional bank presidents

5. Banks and the money supply

• reserves
• fractional-reserve banking
• reserve ratio (rr)
• money creation and destruction
• money multiplier (mm = 1/rr)

6. Monetary policy

• Reserve requirements
• Discount rate
• Open-market operations (relationship between bond prices and interest rates)
• Term Auction Facility