Money and Financial Institutions.

Money can be anything that is generally accepted in payment for goods or services. It pro­vides a medium of exchange, a measure of value, and a store of value. Principal forms of money are currency, demand deposits (checking accounts), and other checkable deposits.

Financial institutions such as commercial banks, savings and loan associations, and savings banks are essential to the smooth operation of a market economy system because demand deposits and other checkable deposits held by banks and thrifts make up the largest part of the money supply. These institutions also provide a safe place for the deposit of funds and serve as a source of loans and other financial services.

Because loans are typically added to demand deposits, one can say that the lending ability of banks serves to "create money." How much money the commercial banks can create is limit­ed by the reserve ratio, which determines the amount of money that a bank can lend at any particular point in time.

The Federal Reserve System is the nation's central bank. It provides banking services for financial institutions and supervises their activities. It also acts as a bank for the federal gov­ernment.

The "value of money" is really its purchasing power-the amount of goods and services it can buy. The purchasing power of money can increase, as it does during periods of deflation, and it can decrease, as it does during periods of inflation.

The causes of inflation are generally described as either demand-pull or cost-push. Demand-push inflation is brought on by an excess of purchasing power that serves to drive up prices ("too much money chasing too few goods"). Cost-push inflation is brought about by rising production costs that feed upon one another. Although certain groups within the economy may benefit from the increasing prices associated with inflation, more people and the econo­my as a whole are likely to suffer.

Topical Vocabulary:

To accept in payment – принимать в уплату

Medium of exchange – средство обмена

Currency – валюта

Demand deposit – вклад до востребования

Savings bank – сберегательный банк

Reserve ratio – резервная квота

To supervise – осуществлять надзор

Purchasing power – покупательная способность

To increase – увеличивать (ся)

Deflation – дефляция

To decrease – уменьшать (ся), снижаться

Inflation – инфляция

Demand-pull – увеличение спроса

Cost-push – рост цен

Excess – избыток, превышение

To benefit – извлекать выгоду

Fiscal Policy

Through fiscal policy (the ability to establish taxing and spending policies), the government can do more than provide basic services. It can influence economic activity.

Suppose the economy is in a recession. This means consumers are spending less, and busi­nesses are not investing in new plants and equipment. In fact, businesses may even be laying off workers. As a result, real GDP, the nation's production, is falling. Government can stimulate economic activity or increase demand for goods and services.

If spending by consumers, businesses, or governments were to increase, GDP would increase. What fiscal policy tools can stimulate the growth of GDP? The government could lower taws and continue to spend the same amount on government programs, or increase government spending while keeping taxes about the same, or simultaneously increase government spending and reduce taxation.

When taxes are cut, individuals and businesses have more income to spend. As business and consumer spending (and therefore GDP) begin to increase, the economy will enter an expan­sion phase. Similarly, if government spending increases, the GDP increases too.

Fiscal tools also can be used to slow the economy. For example, in economic booms, prices may increase at an alarming rate. To end inflation, government could decide to use the fiscal powers. Government could increase taxes, reduce government spending, or both. If taxes were increased, consumers and businesses would have less to spend. This would reduce the total demand for goods and services and the rate of inflation.

Topical Vocabulary:

Fiscal policy – бюджетно-налоговая политика

Taxing policy – налоговая политика

Spending – расходование (расходы)

Government – правительство

Recession – рецессия, спад

To invest – инвестировать, вкладывать

To lay off – увольнять

GDP – Gross Domestic Product – валовой внутренний продукт (ВВП)

To lower taxes – снижать налоги

To keep taxes – сохранять налоги

Income – доход

Rate of inflation – уровень инфляции