Page 263 - Krugmans Economics for AP Text Book_Neat

section 5

Module 22: Saving, Investment, and the
Financial System
Module 23: The Definition and Measurement The Financial
of Money
Module 24: The Time Value of Money
Module 25: Banking and Money Creation
Module 26: The Federal Reserve System: Sector
History and Structure
Module 27: The Federal Reserve System:
Monetary Policy
Module 28: The Money Market
Module 29: The Market for Loanable Funds
Economics by Example:
“Does the Money Supply Matter?”

FUNNY MONEY

On October 2, 2004, FBI and Secret Service agents seized In fact, here’s a riddle: If a fake $100 bill from North
a shipping container that had just arrived in Newark, Korea enters the United States, and nobody ever realizes
New Jersey, on a ship from China. Inside the container, it’s fake, who gets hurt? Accepting a fake $100 bill isn’t like
under cardboard boxes containing plastic toys, they buying a car that turns out to be a lemon or a meal that
found what they were looking for: more than $300,000 turns out to be inedible; as long as the bill’s counterfeit
in counterfeit $100 bills. Two nature remains undiscovered,
months later, another shipment it will pass from hand to hand
with $3 million in counterfeit just like a real $100 bill. The
bills was intercepted. Govern- answer to the riddle is that the
ment and law enforcement offi- real victims of North Korean
cials began alleging publicly that counterfeiting are U.S. taxpayers
these bills—which were high - because counterfeit dollars re-
quality fakes, very hard to tell duce the revenues available to
from the real thing—were being pay for the operations of the U.S.
produced by the government of government. Accordingly, the
North Korea. Secret Service diligently moni-
The funny thing is that elabo- tors the integrity of U.S. cur-
rately decorated pieces of paper rency, promptly investigating any
have little or no intrinsic value. In- “The Atrain Is On the Banks,” by James Flora, 1996, © Jim Flora Art LLC; Courtesy Irwin Chusid and Barbara Economon. www.JimFlora. reports of counterfeit dollars.
deed, a $100 bill printed with blue The efforts of the Secret Serv-
or orange ink literally wouldn’t be ice attest to the fact that money
worth the paper it was printed on. isn’t like ordinary goods and
But if the ink on that decorated services. In this section we’ll
piece of paper is just the right look at the role money plays, the
shade of green, people will think workings of a modern monetary
that it’s money and will accept it as system, and the institutions that
payment for very real goods and sustain and regulate it. We’ll
services. Why? Because they be- then see how models of the
lieve, correctly, that they can do money and loanable funds mar-
the same thing: exchange that kets help us understand mone-
piece of green paper for real goods Money is the essential channel that links the various tary policy as carried out by our
and services. parts of the modern economy. central bank—the Federal Reserve.
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