Money Banking and Financial Markets

If you think about it for a moment, you will see that money is a strange thing We study for years so that we can earn a good living, yet each dollar bill is just paper, with no intrinsic value. Money is,useless until we get rid of it. But money is anything but useless from a macroeconomic point of view, In this and the following chapter, we will see that monetary policy is today the most important tool that the government has to the business cycle. The central bank uses its control over the supply of money to stimulate the economy when unemployment begins to rise or to brake the economy when prices rise too quickly. When money is well managed. as was the case for the United States in the 1990s, output grows smoothly with stable prices. But an unreliable monetary system. such as that seen in unstable Russia over the last decade, can lead to inflation or depression. Many of the world’s most devastating macroeconomic problems of the twentieth century can be traced to malfunctioning money systems.

We now begin our study of money. banking, and financial markets. Using our’ thematic diagram, Figure 25-1 shows the topics covered in this chapter. We start by looking at the essence of money and then analyze interest rates. In the second .section of this chapter. we examine the banking system and the supply of money. This will serve as an introduction to the next chapter’s analysis of central banking and of the impact of money on overall economic activity conclude this chapter analyzing a crucial part of our financial systems the stock market.

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