Money and the Federal Reserve System

1. Money and the Federal Reserve System • Key Concepts • Summary ©2005 South-Western College Publishing

2. What is discussed in this chapter? We discuss the three functions money, definitions of money, and organization and services of the Federal Reserve System

3. What is barter? The direct exchange of one good for another good, rather than for money

4. What is the problem with barter? It requires a coincidence of wants

5. What is money? Anything that serves as a medium of exchange, unit of account, and store of value

6. What is the advantage of money? The use of money simplifies and therefore increases market transactions

7. What are the functions of money? • Medium of exchange • Unit of account • Store of value

8. What is amedium of exchange? The primary function of money to be widely accepted in exchange for goods and services

9. What is aunit of account? The function of money to provide a common measurement of the relative value of goods and services

10. What does it mean that money is liquid? It is available to spend in exchange for goods and services without any additional expense

11. Are credit cards money? No, credit cards fail to meet the store-of-value criterion and are therefore not money

12. What is the best level of scarcity for money ? The supply of money must be great enough to meet ordinary transactions needs, but not be so plentiful that it becomes worthless

13. What are other properties of money? Money must be … • portable • divisible • uniform • acceptable

14. What iscommodity money? Anything that serves as money while having market value in other uses

15. Is our money backed up by gold or silver? No, our paper money was exchangeable for gold until 1934, and in 1963 Congress removed the right to exchange $1 bills for silver

16. What is fiat money? Money accepted by law and not because of redeemability or intrinsic value

17. What makes our dollar bills fiat money? All our bills claim that “This note is legal tender for all debts public and private”

18. What doeslegal tender mean? Legally dollar bills cannot be refused as payment for a debt

19. What is currency? Money, including coins and paper money

20. What arecheckable deposits? The total of checking account balances in financial institutions convertible to currency “on demand” by writing a check without advance notice

21. What is M1? The narrowest definition of the money supply. It includes currency, traveler’s checks, and checkable deposits

22. What is M2? The definition of the money supply that equals M1 plus near monies, such as savings deposits and small time deposits of less than $100,000

23. What is M3? The definition of the money supply that equals M2 plus large time deposits of $100,000 or more

24. What distinguishes M1 from M2 and M3? M1 is more liquid than M2 or M3

28. What is the federal reserve system? The 12 central banks that service banks and other financial institutions within each of the Federal Reserve districts

29. What is the Board of Governors of the Fed? The seven members appointed by the President and confirmed by the U.S. Senate

30. How long does a board member serve? They serve for a non-renewable fourteen-year term

31. What is the responsibility of the board? To supervise and control the money supply and the banking system of the U.S.

32. What is the chairman of the Board of Governors? The President designates one member of the Board to serve as chair for a renewable four-year term

33. Who isAlan Greenspan? Chairman of the Board of Governors of the Fed

34. What is the Federal Open Market Committee? The FOMC is the Fed’s committee that directs the buying and selling of U.S. government securities

35. What is the purpose of the FOMC? To increase the money supply if we have unemployment and decrease it if we have inflation

36. What is the Federal Advisory Council? 12 prominent commercial bankers who council board members but who do not have voting rights

37. What percent of all deposits reside in member banks? About 70%

38. The Fed’s Organization Board of Governors Regional Fed Banks U.S. Banking System

39. What does a Federal Reserve Bank do? • Controls the money supply • Clears checks • Supervises and regulates banks • Maintains and circulates currency • Protects consumers • Maintains federal government checking accounts and gold

40. What is the Federal Deposit Insurance Corporation? The FDIC is a government agency established in 1933 to insure commercial bank deposits up to a specified limit

41. What is theMonetary Control Act? A 1980 law that gave the Fed greater control of nonmember banks and makes all financial institutions more competitive

42. Key Concepts

43. What is barter? • What is money? • What are the functions of money? • What does it mean that money is liquid? • What are other properties of money? • What is commodity money? • Is our money backed up by gold or silver?

44. What is fiat money? • What is currency? • What is M1? • What is M2? • What is M3? • What is the Federal Reserve System? • What is the Board of Governors?

45. What is the Chairman of the Board of Governors? • What is the Federal Open Market Committee? • What is the Federal Advisory Council? • What does a Federal Reserve Bank do? • What is the Federal Deposit Insurance Corporation (FDIC)?

46. Summary

47. Money can be anything that meets these three tests. Money must serve as (1) a medium of exchange, (2) a unit of account, and (3) a store of value. Money facilitates more efficient exchange than barter. Other desirable properties of money include scarcity, portability, divisibility, and uniformity.

48. Medium of exchange is the most important function of money. This means that money is widely accepted in payment for goods and services.

49. Unit of account is another important function of money. Money is used to measure relative values by serving as a common yardstick for valuing goods and services.

50. Store of value is the property of money to hold its value over time. Money is said to be highly liquid, which means it is readily usable in exchange.