• Unit 4: Money, Banking, and Monetary Policy

    Monetary policy refers to the methods government agencies, such as the U.S. Federal Reserve, use to convince banks, businesses, and individuals to change their interest rates, money supply, and demand for money. Money serves as a medium of exchange, a store of value, and a unit of account. These three functions enable individuals to avoid the bartering system – we pay businesses money for their services rather than offer a loaf of bread or another value item in exchange. The ways we define and measure money are important to managing an economy. Savings and investment are key elements within the circular flow model and function of interest rates.

    Completing this unit should take you approximately 5 hours.

    • 4.1: Money

      Before money was invented, the barter system was slow and burdensome because it depended on a double coincidence of wants – a baker must be interested in receiving a goat in exchange for the loaf of bread he gives a goat herder. Money has three functions: a store of value, a unit of account, and a medium of exchange. Banks create money when they issue loans and earn interest from their borrower. Neither the banks nor the economy earns anything from idle money in a savings account. Instead, they channel money from savers to borrowers to earn money from the loans they issue. Or they invest the money you deposited in your savings account to earn interest. The money supply increases when banks experience an increase in their reserves. Central banks, like the U.S. Federal Reserve, operate similarly, since they lend money to the banks. Money is created when a country's money supply increases.

    • 4.2. Creation of Money

      Banks create money by approving loans – their business charges interest to people and businesses who take out loans to buy a house, office building, car, raw materials, or purchase the business inventory they plan to sell. Meanwhile, bank customers receive a portion of the interest the bank earned from the borrower for the money they deposit at the bank. Neither the bank nor the economy earns income if money sits idle in a savings account.

    • 4.3: Structure and Powers of the Federal Reserve System

      Every industrialized nation has a central bank – Germany has the Bundesbank, the United Kingdom has the Bank of England, and the United States has the Federal Reserve Bank. The U.S. Federal Reserve system has three critical entities: the Board of Governors, 12 Federal Reserve Banks spread throughout the United States, and the Federal Open Market Committee. The Federal Reserve Act created the Federal Reserve in 1913 to serve as America's central bank and actively monitor the country's money supply. The Federal Reserve is an independent government agency. The Board of Governors, located in Washington, D.C., is an agency of the federal government and reports to and is directly accountable to Congress.

    • 4.4: Financial Markets

      Financial markets are any place or system that provides buyers and sellers the means to trade financial instruments, such as bonds, equities, international currencies, and derivatives. Financial markets transfer funds from savers to borrowers who need funding. They facilitate this interaction between people and businesses that need capital and those with capital to invest, which helps economic growth.

    • Unit 4 Assessment

      • Receive a grade