Presentation Transcript

1. Scott Wentland wentlandsa@longwood.edu 434-395-2160 Longwood University201 High StreetFarmville, VA 23901
2. The government also plays another important role: it is in charge of money Money is anything that is widely accepted as a means of payment. Currency: Paper bills and coins. Bank reserves held by banks at the Fed. Checkable deposits: your checking or debit account. Savings deposits, money market mutual funds, and small-time deposits.
3. The 2 Kinds of Money Commodity money: takes the form of a commodity with intrinsic value Examples: gold coins, cigarettes in POW camps 0 Fiat money: money without intrinsic value, used as money because of govt decree Example: the U.S. dollar THE MONETARY SYSTEM
4. The U.S. Money Supplies
5. Who is in charge of money in the US? The Federal Reserve Central Bank of the United States, also called “the Fed” Can issue and create money. Influence interest rates and engages in monetary policy
6. Is a bank with two customers. It is the government’s bank. Maintains the bank account of the U.S. Treasury. It manages government borrowing. Issuing, transferring, and redeeming of U.S. Treasury bonds, bill, and notes. It is the banker’s bank. Banks keep their own accounts at the Fed. Banks can borrow from the Fed. The Fed Also… Regulates other banks. Manages the nation’s payment system. Protects financial consumers with disclosure regulations. Most important function: Regulating the U.S. money supply.
7. Three Major Tools the Fed Uses to Control the Money Supply Open market operations: buyingand selling of U.S. government bonds on the open market. Influences interest rates Discount ratelending and the term auction facility: Federal Reserve lending to banks and other financial institutions. Required reservesand payment of interest on reserves: Changing the minimum RR; paying interest on any reserves held by banks at the Fed.
8. Its tools determine how much money is floating in the economy Raise the money supply Generally associated with lower interest rates Lower the money supply Generally associated with higher interest rates Controlling the money supply and influencing interest rates is the key policy tool it uses to help stabilize the economy More about this in Principles of Macroeconomics
9. Monetary policy is the primary controller of inflation Inflation is an ↑ in the average level of prices. Usually measured by the CPI (Consumer Price Index) and other indices
10. The Fed has an extraordinarily important job Oversee how much money is in the economy Stabilize the economy Control interest rates and inflation Regulates and oversees financial markets and the entire banking system This is why you see it in the newspaper so much When the Fed speaks, markets listen The world listens…
11. Monetary policy Federal Reserve stabilizing the business cycle Mostly through money creation, interest rates, NGDP Fiscal policy Federal budget (Congress & the President) stabilizing the business cycle Mostly through taxes & spending Both address issues with AD Pro’s and con’s
12. Final thoughts: Macroeconomic policy is very difficult because the economy is so complex Economists have just scratched the surface in understanding the complexities of the economy and market A little economics can go a long way But even economic experts must be humble about the limits of our knowledge