Chapter 29: The Monetary System

Chapter 29 is about the monetary system. This chapter introduces us to money and its functions. Money is an asset in an economy that people regularly use to buy goods from others. There are three functions of money. It is a medium of exchange so it is something that buyers give to sellers if they want to buy goods. It is also a unit of account which means it is a standard measurement for people to post prices and record debts. Lastly, it is a store of value which means that it is an item people can transfer from the present to the future. Liquidity is used to describe the ease where you can convert an asset into an economy’s medium of exchange. Money is the economy’s medium of exchange therefore, it is the most liquid asset available. Stocks and bonds are relatively liquid since they can be sold and bought easily. The FED controls the money supply primarily through open-market operations: the purchase of government bonds increase the money supply, and the sale of government bonds decreases the money supply. The FED can also expand the money supply by lowering reserve requirements or decreasing the discount rate, and it can contract the money supply by raising reserve requirements or increasing the discount rate. When banks loan out some of their deposits, they increase the quantity of money in the economy. Due to the fact that banks influence the money supply in this way, the FED's control of the money supply is imperfect.