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Sample text

7. The Federal Deposit Insurance Corporation (FDIC) enables the public to feel confident that funds deposited in a bank or savings and loan, up to a limit (currently $100,000), are safe. If the institution fails, the FDIC will step in and pay off the depositors. When fi nancial institutions were failing daily during the early years of the Great Depression in the 1930s, the government became convinced of the pressing need for such an agency. gov/. 8. Examples of very large nonfinancial institutions that have entered the lending business include General Electric (GE), Sears, and General Motors (GM), all of which now issue credit cards.

For monetary exchange to proceed in an orderly fashion, however, there must be some method of specifying the amount of money required to pay for a given quantity of a particular good. In other words, there is a need for an accounting unit, commonly referred to as a unit of account. Because all domestic prices and financial records, including debts, in the United States are expressed in dollars, the dollar serves as our monetary unit of account—it is the standard measure of value. To appreciate why it is convenient to have a standardized unit of account, imagine the poor grocer and the grocer’s customers who, in the absence of money and a unit of account, would have to remember that one computer keyboard equals one gallon of milk, one crate of oranges equals 3 pounds of cheese, and so forth.

9 Financial Institutions, p. 8 Financial Intermediaries, p. 8 Financial Markets, p. 8 Fiscal Policy, p. 14 Indirect Finance, p. 8 Laissez-Faire, p. 15 Liquidity, p. 10 Macroeconomics, p. 4 Microeconomics, p. 4 Monetary Policy, p. 13 Money, p. 6 Net Borrowers, p. 7 Net Lenders, p. 7 Recession, p. 14 Saving, p. 6 Transactions Costs, p. 10 Review Questions 1. Provide a short discussion or definition of the following terms: economics, finance, the financial system, net lenders, net borrowers, direct and indirect finance, financial markets, financial intermediaries, liquidity, business cycle, depository institutions, and monetary policy.

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