The Monetary System: What It Is and How It Works

February 13, 2024

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Money

Money is the stock of assets that can be readily used to make

transactions.
Functions of money:
store of value
unit of account
medium of exchange
Types of money
Commodity Money Money with intrinsic value (i.e., gold standard)
Fiat Money Money with NO intrinsic value

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The Role of Banks in the Monetary System

M=C+D
100 Percent Reserve Banking If banks hold 100 percent of deposits
in reserve, the banking system does not affect the money supply.
Fractional Reserve Banking In a system of fractional reserve
banking, banks create money.
Bank Capital The equity of the bank owners.
Leverage The use of borrowed money to supplement existing funds
for investment. Leverage ratio is the ratio of a bank’s total asset to bank
capital.
Capital Requirement It ensures that the banks will be able to pay off
their depositors and other creditors.

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