Transcript Money - Cloudfront.net

Unit 7
Money, Banking, and
Monetary Policy
According to your textbook on page
492, the ideal money should have 7
characteristics? What are they? And
do you think our “money” fulfills those
7 criteria? Explain!
The Ideal Money is…
1.
2.
3.
4.
5.
6.
7.
_____________________
_____________________
_____________________
_____________________
_____________________
_____________________
_____________________
• Does our “money” fulfill those 7
criteria? Explain!
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
The Function of Banks
Discuss with a partner:
• How do banks make a profit????
_______________________________________
_______________________________________
_______________________________________
_______________________________________
History of Banking
1. 1st bankers were ___________________ where
people deposited gold to vaults for a _____
2. Goldsmiths gave a __________ to a depositor and
this became __________
3. Used a 100% ___________________ in the
beginning, meaning __________ money was
completely backed by __________
4. Then, they realized that they didn’t need to
keep all the gold.
5. The Goldsmiths began __________ out some
portion of the money they had (__________
__________ Loans). This is called a __________
__________ __________ .
Create a Flow Map explaining the
history of banking
**You may include sub-steps
below**
What is Money???
_______________________________________
_______________________________________
_______________________________________
The 3 Functions
of Money
• _____________________ : it can be
used to __________ goods and
services
• _____________________ : it can be
used to __________ the value of
different goods and services
• _____________________ : It can be
__________ to buy something in the
future
Tree Map
• Create a Tree Map describing the
three functions of money!
• (Include term, definition, & visual)
Three Functions of
$$
Why Our Money Has Value:
• _____________________
-- Throughout the world, $$$ are
accepted as form of money
• _____________________
-- $$$ accepted for money because
government says so
• _____________________
-- “Money doesn’t grow on trees”
Bank Terminology
• _____________________ — total deposits
banks have
• _____________________ — deposits bank
cannot use to make a profit
• _____________________ — deposits
banks can use to make a profit
• Vault Cash—cash reserves on hand2%
THE FEDERAL RESERVE – “___________”:
(The U.S. central banking system)
• Created in _____ after a series of bank failures.
The Fed Board of Governors:
• __ members appointed by the President, with
confirmation by the Senate
• Board members serve ____ year terms
• _____________ appoints the chairperson (____
_____________) to a ___ year term.
____?__Regional Federal Reserve Banks:
• Regional banks are located in major cities around
the country
• Each bank has a president chosen by the bank’s
board of directors
• The board of directors is typically drawn from the
local business and banking community
The Federal Reserve
=_________________________________
One of the functions of the Fed is to
____________ the money supply
through ____________ ____________ .
Monetary policy works by
encouraging or discouraging banks
from making __________.
What are the two extremes of
the business cycle???
_____________
_____________
• TOO ______
SPENDING
• TOO _____
SPENDING
• The Fed needs to
__________ the
_________ _________
• The Fed needs to
__________ the
__________ __________
Recession:
Too ________ spending!!!
• Try to correct this problem with your
partner!
• Example:
– Let’s say you have only $1 in your wallet right
now. Name something you would be able to
buy for a $1.
– Now, let’s say that your Money Supply (MS)
went up…and now you have $5. What would
you be able to buy now???
– When your supply of money increased, what
happened to your total spending. Did it go up
or down???
Write down how you and your partner
would correct a recession…
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
Inflation:
Too _______ spending!!!
• Now, think of this new
economic problem
when spending is too
high.
• With a partner, discuss
your answer for the
following questions.
• If there is too much
spending in the U.S.
economy during a period of
high inflation, what needs
to happen to the Money
Supply to help pull the U.S.
out of a recession???
• How does decreasing the
MS help us get out of a
period of high inflation???
Write down how you and your
partner would correct inflation…
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
Monetary Policy
• Changes in the __________ __________ ,
intended to maintain __________ prices,
__________ employment and economic
__________ (3 __________ Econ Goals!)
• If the Fed is fighting unemployment
and declining GDP (recession), it
wants to __________ the money supply.
• If the Fed is fighting inflation, it wants
to __________ the money supply.
Read ‘The Tools of The Fed’
After you are done reading, complete the chart below…
Problem:
Recession
The MS needs to ____
Problem:
Inflation
The MS needs to ____
Reserve
Requirement
RR: ______
Explain how this
specific action will get
the economy out of a
recession.
RR: ______
Explain how this
specific action will get
the economy out of an
inflationary problem.
Discount
Rate
DR: _____
Explain how this
specific action will get
the economy out of a
recession.
DR: _____
Explain how this
specific action will get
the economy out of an
inflationary problem.
Open-Market Operations
OMO: _____
Explain how this
specific action will get
the economy out of a
recession.
OMO: ______
Explain how this
specific action will get
the economy out of an
inflationary problem.
3 Tools of The Fed
• RESERVE REQUIREMENT
• DISCOUNT RATE
• OPEN MARKET OPERATIONS
3 Tools of The Fed
• __________ __________
– The absolute lowest % that all banks must
keep of their actual reserves
• __________ __________
– The interest rate that the Fed charges on
commercial banks
– (Wells Fargo, Wa-Mu, B of A)
• __________- __________ __________
– Gov’t bonds (IOUs) that can be bought and
sold in the open market
Reserve Requirements
•
•
•
The reserve requirement is the
minimum percent of deposits that banks
must keep on reserve in their banks
When the Fed lowers the reserve
requirement, banks have _____ money to
lend and the money supply ____________
When the Fed raises the reserve
requirement, banks have ________ money
to lend and the money supply ___________
Discount Rate
• The discount rate is the interest rate that
the Fed charges on loans to banks.
• When the Fed lowers the discount rate,
banks are encouraged to make ______
loans and the money supply ____________.
• When the Fed raises the discount rate,
banks are discouraged from making loans
and the money supply ____________.
Open Market Operations
• When the Fed buys or sells U.S. govt.
bonds (IOUs) to influence the money
supply
• When the Fed buys bonds, bank deposits
_________, banks have _______ money to
lend, and the money supply _____________
• When the Fed sells bonds, bank deposits
__________, banks have ________ money to
lend, and the money supply _____________.
When Fighting Recession:
MS needs to _______
• __________ Monetary
Policy Using a
Money Market
Graph
• To ___ the MS, the
Fed can:
– RR: _____
– DR: _____
– OMO: _____
When Fighting Recession:
MS needs to _______
• __________ Monetary
Policy Using AD
and AS Analysis
• RR______
• DR___  MS____ 
i_____  I & C ___
AE_____  AD____
PL/OE_____
• OMO_____
When Fighting Inflation:
MS needs to _______
• __________ Monetary
Policy Using a
Money Market
Graph
• To ___ the MS, the
Fed can:
– RR: _____
– DR: _____
– OMO: _____
When Fighting Inflation:
MS needs to _______
• __________ Monetary
Policy Using AD
and AS Analysis
• RR______
• DR____  MS____ 
i_____  I & C ___
AE_____  AD____
PL/OE_____
• OMO_____
Wrap-Up: True or False
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**If False, write the correct answer**
For a given money demand curve, an increase in
money supply results in a decrease in interest rates.
Monetary policy is carried out by adjusting taxes and
government spending.
One necessary characteristic of money is that it must
be unlimited in supply.
Money is anything that is widely accepted for goods
and services.
The MS needs to decrease in order to fight inflation.