Foundations of Economics, 8th Edition

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 ...