The document discusses money and the monetary system. It defines money and its key functions as a medium of exchange, unit of account, and store of value. It describes the Federal Reserve as the central bank that regulates the US monetary system and controls the money supply through tools like open market operations, reserve requirements, and interest rates. When banks make loans from their deposits, this increases the money supply through fractional-reserve banking and the money multiplier effect. However, the Fed's control over the money supply is imperfect as it cannot directly control lending or deposit amounts.

1. 10 MONEY AND PRICES IN THE LONG RUN

2. 29 The Monetary System

10. Figure 1 Money in the U.S. Economy Copyright©2003 Southwestern/Thomson Learning Billions of Dollars 0 • Currency ($580 billion) • Demand deposits • Traveler ’ s checks • Other checkable deposits ($599 billion) • Everything in M1 ($1,179 billion) • Savings deposits • Small time deposits • Money market mutual funds • A few minor categories ($4,276 billion) M1 $1,179 M2 $5,455

19. The Federal Reserve System Copyright©2003 Southwestern/Thomson Learning

35. The Money Multiplier Assets Liabilities Second National Bank Reserves $9.00 Loans $81.00 Deposits $90.00 Total Assets $90.00 Total Liabilities $90.00 Money Supply = $190.00! Assets Liabilities First National Bank Reserves $10.00 Loans $90.00 Deposits $100.00 Total Assets $100.00 Total Liabilities $100.00