Question

In: Economics

What is money and why is it important to our economy? Are savings accounts money? Explain....

  1. What is money and why is it important to our economy?
  2. Are savings accounts money? Explain.
  3. Is U.S. currency backed by gold or anything else? Why do people work hard to get it?
  4. What is the primary role of our banking system?
  5. Explain how banks can create money.
  6. Describe the structure and roles of the Federal Reserve.

Solutions

Expert Solution

  1. What is money and why is it important to our economy?

Money is that money does. Any thing that is used as medium of exchange and store of value, is called money.

Money facilitates the exchange and store the values. it can be used for future payments or deferred payments. Money promotes productions and investments, so growth rate of economy rises.

  1. Are savings accounts money? Explain.

Saving accounts are part of Money but these are regarded as less liquid.

  1. Is U.S. currency backed by gold or anything else? Why do people work hard to get it?

US currency is not fully backed by gold or securities. it is fiat money. People make hard efforts to get it, since they can buy anything else from money.

  1. What is the primary role of our banking system?

Banks collects money from surplus sector and provide money to deficient sector. it increases circulation of money.

  1. Explain how banks can create money.

Banks create money through the credit creation process. Banks makes loans to borrowers keeping certain percent of deposit as reserve. when loans are sanctioned, deposits are opened in name of borrower. Now again bank keeps certain reserve in new deposits and lend out rest. Such process keeps moving. and money is created multiple times. Credit creation capacity depends on required reserve ratio.

  1. Describe the structure and roles of the Federal Reserve.

Federal reserve is operated through the board of governors. There are 7 members in board of governors. These members are appointed for 14 years. Fed is autonomous body.

Fed has been mandated to achieve twin objective of full employment and price stability in economy.


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