 Name: Samer abou saad.

 ID: 12130373.

 Instructor name: Dr. Bassam Hamdar.

 Course title: Macroeconomics.

 Summary of chapter 25:

An overview of money:

Money is anything that serves as a commonly accepted medium of exchange

or means of payment. Money also functions as a unit of account and a store of
value. Before money came into use, people exchanged goods for goods in a
process called barter. Money arose to facilitate trade. Early money consisted of
commodities, which were superseded by paper money and then bank money.
Unlike other economic goods, money is valued because of social convention. We
value money indirectly for what it buys, not for its direct utility. Moreover, money
has a lot of characteristics; it’s durable, uniform, stable, portable and
recognizable..

How banks create money:

Banks are commercial enterprises that seek to earn profits for their owners. One
major function of banks is to provide checking accounts to customers. Modern
banks gradually evolved from the old goldsmith establishments in which money
and valuables were stored. Eventually it became general practice for goldsmiths to
hold less than 100 percent reserves against deposits; this was the beginning of
fractional-reserve banking.

Most money is in the form of bank deposits in the contemporary economic

system. The main way in which those bank deposits are created, is through loans
made by commercial banks. When a bank makes a loan, a deposit is created at the
same time in the bank account held by the borrower. In that way, new money is
created.

Modern banking system:

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The Federal Reserve System:

The Federal Reserve System often referred to as the Federal Reserve or simply
"the Fed," is the central bank of the United States. It was created by the Congress
to provide the nation with a safer, more flexible, and more stable monetary and
financial system. 

The Federal Reserve's responsibilities:

 Conducting the nation's monetary policy by influencing money and credit

conditions in the economy in pursuit of full employment and stable prices.
 Supervising and regulating banks and other important financial institutions to
ensure the safety and soundness of the nation's banking and financial system and
to protect the credit rights of consumers.
 Maintaining the stability of the financial system and containing systemic risk that
may arise in financial markets.
 Providing certain financial services to the U.S. government, U.S. financial
institutions, and foreign official institutions, and playing a major role in operating
and overseeing the nation's payments systems.

How the Federal Reserve controls the money supply:

1. Changing the required reserve ratio:

A change in reserve ratio is seldom used but is potentially very powerful. The reserve
ratio is the percentage of reserves a bank is required to hold against deposits. A decrease
in the ratio will allow the bank to lend more, thereby increasing the supply of money. An
increase in the ratio will have the opposite effect.

2. Changing the discount rate:

The discount rate is the interest rate that the central bank charges commercial banks that
need to borrow additional reserves. It is an administered interest rate set by the Fed, not a
market rate; therefore, much of its importance stems from the signal the Fed is sending to
the financial markets (if it's low, the Fed wants to encourage spending and vice versa). As
a result, short-term market interest rates tend to follow its movement. If the Fed wants to
give banks more reserves, it can reduce the interest rate that it charges, thereby tempting
banks to borrow more.

3. Engaging in open market operation:

Open-market operations consist of the buying and selling of government securities by the
Fed. If the Fed buys back issued securities (such as Treasury bills) from large banks and
securities dealers, it increases the money supply in the hands of the public. Conversely,
the money supply decreases when the Fed sells a security. Note that the terms "purchase"
and "sell" refer to actions of the Fed, not the public. For example, an open-market
purchase means the Fed is buying but the public is selling. Actually, the Fed carries out
open-market operations only with the nation's largest securities dealers and banks, and
not with the general public.

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