Transcript 19_money_fed

Money and the
Federal Reserve System
Four Functions of Money
• Medium of exchange
Money is a tool for exchanging
resources for goods and services
Four Functions of Money
Unit of account
Four Functions of Money
• Standard of deferred payment
IOU
Four Functions of Money
Store of Value
What has been used as money?
Wampum
• Belts of beads
• Beads made from
seashells found in
New York
• Indians made good
ones
• Colonists didn’t
What has been used as money?
Woodpecker
Skulls
Cowrie
Shells
Stones
Pecus
Women
Tobacco Wampum
Corn
Bark
Cloth
Fish
Paper
Pieces
Metals
Barley
Beads
Butter
Animal
Teeth
Feathers
Fur
Liquor
Oats
Peas
Sal
Tobacco
Strings
Whale
Teeth
The Price Level is
determined by:
The relationship between
the amount of money in
circulation and the
amount of goods and
services in the economy.
Requirements of Money
• Confidence
• Scarce
• Even quality
• Maintain value
Money Supply (M1)
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•
Coins
Currency
Demand Deposits
Other checkable accounts
MV = PQ
• M = money supply
• V = velocity of money, how many times
the money supply is used to purchase
final goods and services
• P = the price level
• Q = the quantity of real goods and
services produced
• PQ = Nominal GDP
Inflation
• Assuming V does not change, P is
determined by the relationship between
the change in the amount of money in
circulation and the change in real goods
and services.
• Inflation is caused by an increase in M
that is greater than an increase in Q.
The Federal Reserve
(The Fed)
• Established by Congress with the Federal
Reserve Act of 1913
• Major function – maintain the proper
money supply for stable price level
– Too much money – inflation
– Too little money - unemployment
Two other functions
• Banker to member banks
• Banker to Federal Government
Twelve Federal Reserve Districts