Chapter Summary

Key Points

  1. Define money and describe its functions.

    • Money is anything that serves as a generally accepted means of payment.

    • Money functions as a medium of exchange, unit of account, and store of value.

    • M1 consists of currency held by individuals and businesses, traveler’s checks, and checkable deposits owned by individuals and businesses.

    • M2 consists of M1 plus savings deposits, small time deposits, and money market funds.

  2. Describe the functions of banks.

    • The deposits of commercial banks and thrift institutions are money.

    • Banks borrow short term and lend long term and make a profit on the spread between the interest rates that they pay and receive.

  3. Describe the functions of the Federal Reserve System (the Fed).

    • The Federal ...

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