Money+and+Banking

Fundamental Questions

> Money is anything that is generally acceptable to sellers in exchange for goods and services. Money serves as a medium of exchange, a unit of account, a store of value, and a standard of deferred payment. > There are three definitions of the U.S. money supply. The narrowest definition, the **M1 money supply**, consists of currency, travelers' checks, demand deposits, and other checkable deposits. M2 adds savings and small-denomination time deposits, and retail money market mutual fund balances. M3 equals M2 plus large time deposits, repurchase agreements, Eurodollar deposits, and institution—only money market mutual fund balances. > Countries use the foreign exchange market to convert national currencies to pay for trade. They also use **international reserve assets**, like gold, or **international reserve currencies**, like the dollar. > Banks act as middlemen between savers and borrowers. They accept deposits from savers and use those deposits to make loans to borrowers. > Domestic banking is heavily regulated, whereas international banking is not. Because they are not restricted by regulations, international banks can usually offer depositors and borrowers better terms than domestic banks. > Banks create money by making loans up to the amount of their excess reserves. The banking system can increase the money supply by the **deposit expansion multiplier** times the **excess reserves** in the system.
 * 1) **What is money?**
 * 1) **How is the U.S. money supply defined?**
 * 1) **How do countries pay for international transactions?**
 * 1) **Why are banks considered intermediaries?**
 * 1) **How does international banking differ from domestic banking?**
 * 1) **How do banks create money?**