1
Introduction to Business
Chapter 15: Understanding Money and Financial Institutions
15.1 Show Me the Money
Money is anything accepted as payment for goods and services. For money to be a suitable
means of exchange, it should be scarce, durable, portable, and divisible. Money functions as a
medium of exchange, a standard of value, and a store of value. The U.S. money supply consists
of currency (coins and paper money), demand deposits (checking accounts), and time deposits
(interest-bearing deposits that cannot be withdrawn on demand).
Facts About US Currency:
Currency paper is composed of 25% linen and 75% cotton.
About 4,000 double folds (first forward and then backwards) are required before a note
will tear.
As of mid-July 2017, there was more than $1.56 trillion in U.S. currency in circulation,
with $40 billion in coins.
95% of the notes printed each year are used to replace notes already in circulation.
The largest note ever printed by the Bureau of Engraving and Printing was the $100,000
Gold Certificate, Series 1934.
During fiscal year 2017, it cost approximately 5.4 cents per note to produce nearly 40
billion U.S. paper currency notes.
A stack of currency one mile high would contain over 14 million notes.
If you had 10 billion $1 notes and spent one every second of every day, it would require
317 years for you to go broke.
15.1 Review Questions
1. Define money.
2. What are some characteristics of money?
3. What is money’s function?
4. What does it mean when they say money is a medium of exchange?
5. How does money serve as a standard of value?
6. What is money’s relationship with wealth?
7. What is the U.S. money supply composed of?
● What is currency?
● How is the amount of currency in circulation determined?
● What do demand deposits consist of?
● How do time deposits differ from demand deposits?
For more free, peer-reviewed, openly licensed resources visit OpenStax.org.
, 2
● What is M1 used to describe?
● What does M2 include?
● What is the purpose of credit cards?
● What are credit cards also referred to as?
● If credit cards are not money, what are they?
15.2 The Federal Reserve System
The Federal Reserve System (the Fed) is an independent government agency that performs four
main functions: carrying out monetary policy, setting rules on credit, distributing currency, and
making check clearing easier. The three tools it uses in managing the money supply are open
market operations, reserve requirements, and the discount rate. The Fed played a major role in
keeping the U.S. financial system solvent during the financial crisis of 2007–2009 by making
more than $9 trillion available in loans to major banks and other financial firms, in addition to
bailing out the auto industry and other companies and supporting congressional passage of
Dodd-Frank federal legislation.
15.2 Review Questions
1. What is the central bank of the United States?
2. What is the Fed’s primary mission?
3. What do the Fed’s action affect?
4. What does the Fed consist of?
5. How is the Fed subdivided?
6. What is the most important function of the Federal Reserve System?
7. Name three tools used by the Federal Reserve System, and identify which is used the
most.
8. What is purchased and sold on the open market?
9. What is one way the Federal Reserve might put money into the economy?
10. What are reserved requirements, and what is their percentage range?
11. What happens to interest rates when the reserve requirement results are raised? What
happens to the economy?
12. What happens to interest rates when reserve requirements are lowered? What happens
to the economy?
13. Why is the Federal Reserve called “the banker’s bank”?
14. Define the following terms
a. Discount Rate
b. Spread
c. Selective credit controls
15. What does consumer credit establish?
For more free, peer-reviewed, openly licensed resources visit OpenStax.org.
Introduction to Business
Chapter 15: Understanding Money and Financial Institutions
15.1 Show Me the Money
Money is anything accepted as payment for goods and services. For money to be a suitable
means of exchange, it should be scarce, durable, portable, and divisible. Money functions as a
medium of exchange, a standard of value, and a store of value. The U.S. money supply consists
of currency (coins and paper money), demand deposits (checking accounts), and time deposits
(interest-bearing deposits that cannot be withdrawn on demand).
Facts About US Currency:
Currency paper is composed of 25% linen and 75% cotton.
About 4,000 double folds (first forward and then backwards) are required before a note
will tear.
As of mid-July 2017, there was more than $1.56 trillion in U.S. currency in circulation,
with $40 billion in coins.
95% of the notes printed each year are used to replace notes already in circulation.
The largest note ever printed by the Bureau of Engraving and Printing was the $100,000
Gold Certificate, Series 1934.
During fiscal year 2017, it cost approximately 5.4 cents per note to produce nearly 40
billion U.S. paper currency notes.
A stack of currency one mile high would contain over 14 million notes.
If you had 10 billion $1 notes and spent one every second of every day, it would require
317 years for you to go broke.
15.1 Review Questions
1. Define money.
2. What are some characteristics of money?
3. What is money’s function?
4. What does it mean when they say money is a medium of exchange?
5. How does money serve as a standard of value?
6. What is money’s relationship with wealth?
7. What is the U.S. money supply composed of?
● What is currency?
● How is the amount of currency in circulation determined?
● What do demand deposits consist of?
● How do time deposits differ from demand deposits?
For more free, peer-reviewed, openly licensed resources visit OpenStax.org.
, 2
● What is M1 used to describe?
● What does M2 include?
● What is the purpose of credit cards?
● What are credit cards also referred to as?
● If credit cards are not money, what are they?
15.2 The Federal Reserve System
The Federal Reserve System (the Fed) is an independent government agency that performs four
main functions: carrying out monetary policy, setting rules on credit, distributing currency, and
making check clearing easier. The three tools it uses in managing the money supply are open
market operations, reserve requirements, and the discount rate. The Fed played a major role in
keeping the U.S. financial system solvent during the financial crisis of 2007–2009 by making
more than $9 trillion available in loans to major banks and other financial firms, in addition to
bailing out the auto industry and other companies and supporting congressional passage of
Dodd-Frank federal legislation.
15.2 Review Questions
1. What is the central bank of the United States?
2. What is the Fed’s primary mission?
3. What do the Fed’s action affect?
4. What does the Fed consist of?
5. How is the Fed subdivided?
6. What is the most important function of the Federal Reserve System?
7. Name three tools used by the Federal Reserve System, and identify which is used the
most.
8. What is purchased and sold on the open market?
9. What is one way the Federal Reserve might put money into the economy?
10. What are reserved requirements, and what is their percentage range?
11. What happens to interest rates when the reserve requirement results are raised? What
happens to the economy?
12. What happens to interest rates when reserve requirements are lowered? What happens
to the economy?
13. Why is the Federal Reserve called “the banker’s bank”?
14. Define the following terms
a. Discount Rate
b. Spread
c. Selective credit controls
15. What does consumer credit establish?
For more free, peer-reviewed, openly licensed resources visit OpenStax.org.
