Money, the Federal Reserve System, and Banking You have used money to measure the price, the size of business, total output in the economy, and income. Coins and paper money are called currency. People use currency daily. When you go to a movie, you probably buy a ticket with currency. Coins and paper money work well for small purchases and when payment is made directly from one person to another. But, for large purchases or when payments travels to mail, currency is not practical. A check is a written order to pay money from amounts deposited. Therefore, deposits in checking accounts, credit union share draft accounts, and other similar accounts are considered money. Remember that the most important function of money is as a medium of exchange. Therefore, one reason we demand money is to make exchanges. We can trade our labor for money and then trade the money for what we want to buy. This means that we have a transaction demand for money. The transaction demand for money is the demand for money to make exchanges. We need money to make economic transaction. We want to be paid in money, and we want to use money to buy goods and services. The main factor that affects the transaction demand for money is the level of income in the economy. The higher the level of income, the greater the demand for money and buying power, The asset demand for money is the demand for money in order to hold wealth in the form of money. Some people will always hold some part of their wealth in the form of money. If we use money to buy an asset that pays interest, such as a government or corporate bond, we earn more money in the form of interest payments. The Federal Reserve System is the central banking system in the United States. The United States was slow to adopt a central banking system. Not until 1913 did Congress, under pressure from President Wilson, pass the Federal Reserve Act of 1913. Each Federal Reserve Bank operates as a pr...
