Economics: Theory and Practice, 10th Edition

CHAPTER 7

Money, Financial Institutions, and the Federal Reserve

CHAPTER OBJECTIVES

To define money and explain the functions of money.

To identify the various measures and components of the U.S. money supply and different monetary standards.

To introduce the financial institutions that are important for the maintenance and control of the U.S. money supply, and to highlight commercial banks and commercial bank regulation.

To explain the role of the Federal Reserve system, its organization, and the functions that Federal Reserve banks perform.

To discuss recent legislative and structural changes in the financial institutions system.

We have explored several topics that in one way or another involve money. For example, we learned that economic activity expands or contracts as the size of the spending stream increases or decreases and that with inflation the purchasing power of money deteriorates. Without money, modern economies as we know them could not exist. Even though money does not itself produce goods and services, as do land, labor, capital, and entrepreneurship, it makes large-scale production and distribution possible. If a nation's monetary system becomes unstable, adverse economic consequences can result.

In this chapter we will deal with some basics about money, banks and other financial institutions, and the Federal Reserve, which plays an extremely critical role ...