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Activator. Represents purchasing power, acceptable form of currency, other people will accept it, etc…. Government says so, domestically and internationally accepted, represents value of goods and services.
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Activator Represents purchasing power, acceptable form of currency, other people will accept it, etc… Government says so, domestically and internationally accepted, represents value of goods and services Why do you accept money in exchange for a good or service? What gives money its value?
Activator – Functions of a Bank Functions Description Saving Checking Account Savings account Certificates of Deposit (CDs) A financial establishment that accepts money deposited by customers, pays it out when required, and makes loans at interest. Lending Mortgage Auto Business Personal Credit Cards Wells Fargo, Bank of America, Chase, Citibank, Capital One Bank, etc. Examples
Money and Banking • Money – represents value, used to buy goods and services • Something that is regularly accepted in exchange for goods and services • Three Functions of money: • Medium of exchange • Unit of Account • Store of Value
Jerry Maguire • http://www.youtube.com/watch?v=OaiSHcHM0PA&list=PLD34B596F99A0DE3C&index=9&feature=plpp_video
Jail economy video • http://www.youtube.com/watch?v=uvcMvn9azxc&list=PLD34B596F99A0DE3C&index=10&feature=plpp_video
Functions of Money • Medium of Exchange – “spend money”; “in-between” buyers and sellers • Used to buy and sell stuff • Barter system – economy that relies on trade of one product for another • The direct exchange of products
Unit of Account • Unit of Account– a way to compare prices • Compare the values; “What is the market value?” Fossil – $89.95 Bulova – $399.95 Rolex - $11,995
Functions of Money • Store of Value – “save money” money holds its value if you decide to store it instead of spend it • Money holds value
The Kinds of Money • Commodity money – money that has intrinsic value • Can be used asa commodity • Intrinsic value – item would have value if not used as money • Gold, silver, cigarettes (WW2), tulip bulbs (1600’s Europe), etc • Gold standard – gold used as money; money backed by gold, the US is not on a gold standard
The Kinds of Money • Fiat – “order/decree”; government issued money • Paper dollars • Money that has no intrinsic value
Liquidity • Liquidity – ease with which an asset (liquid asset) can be converted into money/medium of exchange • Liquid – checking account • Nonliquid - House
Money in the U.S. Economy • Money supply – quantity of money (paper and digital) in the economy • 2012 – 9.61 Trillion • Cash, checking accounts and savings accounts
M1 and M2 • M1 – money that people can gain access to easily and immediately; checkable demand deposits (balances in bank accounts) • Demand deposit - an account from which deposited funds can be withdrawn at any time • High liquidity • M2 – consists of all the assets in M1 plus assets that are not as liquid • Slightly less liquid, savings accounts, certificate of deposits (CDS), mutual funds, Individual Retirement Accounts (IRAs),etc.
Characteristics of Money The six characteristics of money • Durability • Portability • Divisibility • Uniformity • Limited in Supply • Acceptability
Chapter 16 - The Federal Reserve • The Federal Reserve (“The Fed”) – the central bank of the U.S. • Created in 1913 by Congress, Federal Reserve Act • US Central Bank – institution designed to oversee the banking system and regulate the quantity of money in the economy. • Monetary policy – “money”, directly affects the nation’s money supply (expansionary or contractionary) • Dollar is officially a “Federal Reserve Note”
Structure of the Federal Reserve • Central Bank is in Washington D.C. • Run by a 7 member board of governors • Appointed by the president, confirmed by the Senate to 14 year terms • Board is led by the chairman • Current chairman – Janet Yellen
Structure of the Federal Reserve • Fed is comprised of Twelve Federal District Reserve Banks • One Federal Reserve Bank for each district • Each bank monitors economic and banking conditions in its district
The Federal Open Market Committee • Structure and function: • Meet 8 times a year to discuss the economy • Run by a 7 member board of governors (in Washington D.C.) and 5 of the 12 regional bank presidents • All attend, only 5 vote, President of New York Fed always votes (financial capital of the world • Increase or decrease the $ money $ supply
Think of a dam… • A dam controls the flow of water downriver. • Releasing too much water would cause flooding. • Too little water would cause a drought.
The Fed is like a dam... • The Fed is like the dam • Releasing too much money would cause inflation. • Too little money would cause a recession.
The Fed’s Tools of Monetary Control • Three monetary policy tools • Open-market operations • Reserve requirements • Interest Rates (Federal Funds Rate/Discount Rate)
Money Supply and Lending What would you do if your friend asked you to borrow your last $10.00?
Money Supply and Lending Would you be more likely to lend them the money if your wallet looked like this?
Less Money Less likely to lend Higher Interest Rates to attract savers More Money More likely to lend Lower Interest Rates to attract borrowers
Borrower Saver • Low Interest Rates • High Interest Rates • Low Interest Rates • High Interest Rates
Government Bonds Bond is a form of an IOU to the government
Banks Buy Bonds Banks buy bonds and earn interest on them
Expansionary Monetary Policy Open-Market Operations Contractionary Monetary Policy
Open-Market Operations • Open-Market Operations – the purchase and sale of bonds by the Fed on the open-market • Most often used tool of the Fed
Open-Market Operations Increase the Money Supply • Buy bonds from the banks – credit the banks with money, increases the money supply • Easy money policy - expansionary monetary policy • Goal is to expand the economy by lowering interest rates • Increase inflation • Encourages banks to lend money to consumers • Discourage saving • Increases the money supply
Open-Market Operations • Decrease money supply • Sell bonds to the bank, withdrawal money, decrease the money supply • Tight money policy – contractionary monetary policy • Goal is to slow the economy by raising interest rates • Contract the economy • Cause inflation to slow (disinflation) • Discourage borrowing • Encourage saving • Restricts the money supply
Open Market Operations Explained • https://www.youtube.com/watch?v=zEP2vkK-LIk&index=37&list=PL58EB0BBFE9FC05FF
Janet Yellen • http://www.youtube.com/watch?v=QXvUVywe3bY
Reserve Requirements • Reserve Requirements – regulations on the minimum amount of reserves that banks must hold against deposits • Banks must have a supply of reserves to protect against "runs" or "panics.“ • 10% on M1 • Influences how much money banks can create from each deposit (reserves) • Increase in RRR, banks must hold more reserves, can loan out less • Decrease in RRR, banks must hold less reserves, can loan out more
Banking Simulation 11,785 Total Deposits _________ Total Reserves ___________ Excess Reserves _________ Total Loans ________ Remaining Excess Reserves 1,178.5 10606.5 5450 5156.50
Bank Runs • https://www.youtube.com/watch?v=lbwjS9iJ2Sw • http://www.youtube.com/watch?v=2EnaU7D80oM&list=PL58EB0BBFE9FC05FF&index=13
Fed Explained • http://content.time.com/time/video/player/0,32068,57544286001_1948059,00.html
Fractional Reserve System • Fractional-reserve system – banks hold only a fraction of deposit reserves as opposed to 100% of deposits • Reserve – money deposit that banks have received but not loaned out • Required and Excess
Money Creation • Required Reserve Ratio – set by the Fed, minimum amount that must be held by the bank on every deposit (required reserves) • Established by the Federal Reserve, 1/10 or 10% of M1 • Excess Reserves – reserves in addition to reserve requirement set by the Fed • $1000 deposit, the bank would hold $100 in reserve and have $900 for lending
