Transcript ECON-4.13-16.12 Money

AGENDA Fri 4/13 & Mon 4/16
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Review HW (pg 403 #1 a-f; 2-5)
QOD #28:Money, money, money!
Purpose of Money
Federal Reserve
Monetary Policy
*Back of Business Cycles Wksht
HW: pg 284 #1-9 RQ ; pg 292 #1-6; pg 306 #1-5; pg 406 #1-5
– Extra Credit #2
– Study for Macro Exam: Thurs 4/19 & Fri 4/20
– Stock Printout #4 Mon 4/23 & Tues 4/24
QOD #28: Money, money, money!
• Describe what you think life would be like in a
world where money did not exist.
– Imagine you woke up tomorrow and there was no
money at all, neither paper currency nor coins.
– How would your life be different?
– How would goods/services be exchanged?
– How would the value of goods/services be determined?
• Double coincidence of
wants is when each party
wants what the other has.
This is required in a barter
economy.
• Transaction costs: time and
effort spent to make an
exchange.
• Money: any good that
is widely accepted in
exchange for goods or
replacement of debts.
• Money lowers the
transaction costs of
exchanges.
• Lowering transaction
costs means freeing up
time. Provides more
goods, services, and
leisure time.
• Specialization: produce
one item and earn
money to buy others.
• Gresham’s Law: Bad
money drives good
money out of circulation.
• Medium of Exchange:
anything that is acceptable
in exchange for goods and
services.
• Unit of Account: common
measurement in which
value is expressed.
• Store of Value: maintains
value over time.
Components of the Money Supply
• The money supply is the total supply of money in
circulation
Money Supply = Currency + Checking Accounts + Travelers checks
• Currency
– coins and paper money
• Checking Accounts
– or demand deposit, funds can be converted to currency on
demand
• Traveler check
– check issued by a bank which is signed at time of issue and when
it is cashed
Is a savings account ‘money?’
• Not if you can’t write checks on it
– (i.e. it is not an accepted method of exchange)
• It is considered near money assets that can
be easily and quickly turned into money
Chapter 11-1: Federal Reserve
System
The Fed
• When you hear the term, “the Feds,” what images or ideas
come to mind?
• Fact:
– The “Feds” in economics actually relates to the Federal Reserve
System.
• Based on that information, what do you think the “Fed”
does in our economy?
• Fact:
– The Federal Reserve System is the central bank and regulates the
banking system in our country.
• Based on that information, how do you think the “Fed”
accomplishes these duties in our country?
The Federal Reserve System
• The Federal Reserve System (also called the
Fed) is the central bank of the United States.
• set up by the Federal Reserve Act in 1913.
• located in Washington, D. C.
• 2 main parts of the Federal Reserve System
• 1. Board of Governors
• 2. 12 Federal Reserve district banks.
Board of Governors
• The Board of Governors of
the Federal Reserve
System controls and
coordinates the Fed’s
activities.
• The Board is made up of 7
members, each appointed
for a 14 year term.
Chairman of the Board
• The current Chairman of the
Board is Ben S. Bernanke
until 2014 (2nd term).
– Chairman of the Board is named
by the President from among the
members and confirmed by the
Senate.
– They serve a term of four years.
12 Federal Reserve District Banks
• The district banks are located all around the United States
and each has a president.
• The Federal Open Market
Committee (FOMC) is the
major policy making
group within the Fed.
• Seven of the twelve
members of FOMC are
members of the Board of
Governors. The other five
members come from the
presidents of Federal
Reserve district banks.
Functions of the Federal Reserve System
• Control the money supply / monetary policy- help
promote economic goals
• Supply the economy with paper money- money is printed
by the Fed and supplied to the 12 district banks. (mints coin
$$)
• Hold bank reserves- each commercial bank is required to
have a reserve of money with the Fed
• Provide check-clearing services- check movement from
bank to bank
• Supervise member banks- to ensure that banks lending
policies are ethical and up to all regulations.
• Serve as the lender of last resort- will lend $$ to banks
who cannot get $$ from any other place.
Control the money supply
• The Federal Reserve controls the three
tools of monetary policy:
1. open market operations
• Conducted by FOMC
• Sell or Buy govt securities (can be traded)
– Treasury bills (mature in less than 1 year)
– Treasury notes (mature in 2-10 years)
– Treasury bonds (mature in 20-30 years)
2. the discount rate
3. reserve requirements
Bank Reserve Information
• Total reserves - the sum of a bank’s deposits in in
the reserve account at the Fed & Vault cash.
• Required reserves - the minimum amount of
reserves a bank must hold against its deposits as
mandated by the Fed.
– Banks can make loans with their excess reserves.
• Ex: A bank has excess reserves of $4 million, it can make loans
of $4 million.
This is why the Fed is so Important!
• The Fed controls the federal discount rate
which when changed triggers a chain of
events that affect other short-term interest
rates, foreign exchange rates, long-term
interest rates, the amount of money and
credit, and, ultimately, a range of economic
variables, including employment, output,
and prices of goods and services.
Monetary Policy
• expansionary monetary policy – Fed increases
money supply to increase total money supply
– objective is to reduce unemployment rate
• contractionary monetary policy – Fed decreases
MS to decrease total MS
– objective is to reduce inflation
Expansionary Monetary Policy
• To lower unemployment rate
– Fed increase MS
– greater MS = greater total supply
– firms begin to sell more products
– firms hire more workers
• No crowding out with monetary policy
• An increase in MS will increase total spending
indirectly lowering unemployment
Contractionary Policy
• contractionary monetary policy – works to reduce
inflation
– Fed decreases money supply
– this will lower total spending
– firms begin to sell less
– firms reduce prices to get rid of excess inventory
Monetary Policy and Exchange
• the objective of monetary policy is to
maintain a stable P (price level)
– neither inflation - P rising
– nor deflation – P falling
• Read pages 405-406
• automatic stabilizers?
references
• http://www.federalreserve.gov/aboutthefed/d
efault.htm
• Arnold, R (2001). Economics in our times, 2nd
edition. Chicago, IL: National Textbook Company .