Money

1. Money

2. What is money? • Really what is it? • What makes it different from just a piece of paper that is green?

3. If a robber says, “Give me your money”, This is what the reply could be. “Let’s see, do you want the: 1. Cashin my pocket, my 2. Debit Card, my 3. Traveler’s Checks, my 4. NOW or Super NOWAccount, my 5. Money Market Account or - may I just write you a 6. Check “Give me your money.”

4. Money is also easier to tax. So a monetary system is betterthan abarter system. The monetary system enables the“calculationof exchange” to go much faster.

5. THE MEANING OF MONEY Moneyis the set of assets in an economy that people regularly use to buy goods and services from other people.

6. Three Functions of Money Medium of Exchange – used to buy goods/services. Unit of Account –used to measure & compare. Store of Value – used to accumulate wealth.

7. Three FUNCTIONS OF MONEY 1.Medium of Exchange [any asset that sellers will accept as payment for g/s] Medium means “something in the middle”, so money is a“medium of trade between buyers and sellers” because it can be exchanged for something else. Avoids “double coincidence of wants” that bartering requires. You would have to have a trading partner who “wants to sell you goods you want to buy”and“wants to buy goods you want to sell.” Liquidity– how easily an asset can be converted intocash without any additional expense.[Cash has 100% liquidity]

9. The Functions of Money • Medium of Exchange • A medium of exchange is an item that buyers give to sellers when they want to purchase goods and services. • A medium of exchange is anything that is readily acceptable as payment.

10. The Functions of Money • Unit of Account • A unit of account is the yardstick people use to post prices and record debts. • Store of Value • A store of value is an item that people can use to transfer purchasing power from the present to the future.

11. Three FUNCTIONS OF MONEY $249.00 2.Unit of Account [measuring the relative value of goods by stating prices] Example: Microsoft Stock is selling for $50 a share. The new Jag is selling for $32,000. A $2 item is twice as valuable as a$1 item. Money is like a yardstick. People use it to compare the worth of things that they buy and sell.

12. Three FUNCTIONS OF MONEY Greek Coin 2,500 years old 3. Store of Value[storing wealth from one point in time to another] [doesn’t wear out easily and holds up to inflation] Ability of money to hold value over time [Money that lacked durability or did not hold up well toinflation would not make good money [would not store value]. Ice cream cones would suffer monetary meltdown, become a sticky puddle. If money suffers high inflation, it causes the value of money to “melt.” Other desirable qualities for money are: A. Scarcity B. Portability C. Divisible D. Difficult to counterfeit

13. The Functions of Money • Liquidity is the ease with which an asset can be converted into the economy’s medium of exchange.

14. Commodity Money:something that performs the function of money and has alternative, non-monetary uses. Gold, silver, cigarettes, corn Fiat Money: anything the government declares as money by government decree, but has no other important uses. Paper notes Coins Two Types of Money Alternative uses such as …

15. The Kinds of Money • Commodity money takes the form of a commodity with intrinsic value. • Examples: Gold, silver, cigarettes.

16. Fiat money is used as money because of government decree. • It does not have intrinsic value. • Examples: Coins, currency, check deposits. • Used to be backed by gold on gold standard but not anymore

17. Money in the U.S. Economy • Currency is the paper bills and coins in the hands of the public.

18. Demand deposits are balances in bank accounts that depositors can access on demand by writing a check.

19. M2 $6,398 • Savings deposits • Small time deposits • Money market mutual funds • A few minor categories ($5,035 billion) M1 $1,363 • Demand deposits • Everything in M1 • Traveler ’ s checks ($1,363 billion) • Other checkable deposits ($664 billion) • Currency ($699 billion) Figure 1 Two Measures of the Money Stock for the U.S. Economy Billions of Dollars 0

20. Money In The American Economy - 2008 M2 [near money] Savings Deposits, including Money Market Deposit Accounts 52% M1 [money or MS] Currency 56% Money Market Mutual Funds 14% M1[money] is part of M1 18% Small Time Deposits 16% Checkable Deposits 44% M1 $1,365 billion M2 $7,499 billion

21. Money In The American Economy Currency + DD equal M1[Spendable Money] M1 M2 Also included here would beTravelers checks, Checklike deposits[NOWand Super NOWAccts] M1 18% M1 Completely Liquid $1,365 [billions] 16% Small TD 2% 54% 44% 14% MMMF M1+ savings deposits, small TDs [CDs, bonds ,etc.] under $100,000,MMMF’s, & MMA’s = M2 52% Savings Deposits, & MMA’s “V” – how many times a dollar changes hands in a year V = GDP[Y]/M1 = 14 tr./1.3 tr. = 11 $7,499

22. Credit Cards Aren’t money they are debt • Debit Cards or Check Cards don’t count these are still under • checkable /demand deposits.

23. What about Credit Cards? Are they money? They are not “plastic money.” They do serve as a: 1. medium of exchange& the 2. credit card statementservesas aunit of account. 3. but, they donot have a store of value. If the credit card company goes out of business or decides not to honor your card, it is worthless. They are not money because they don’t store value.

24. Our Money Is Growing More Abstract. Money has grown increasingly more abstract. - from a physical commodity, - to a piece of paperrepresenting a claimon a physical commodity, - to a piece of paper of no intrinsic value, - to an electronic entryrepresenting a claim on apieceof paper of no intrinsic value. [just a Federal Reserve note]

25. The Value of Money and Price Level Value of Money Prices The value of money goesin the opposite direction of the general price level. Or, the amount a dollar will buyvaries inversely with the price level.

26. CASE STUDY: Where Is All The Currency? • In 2004 there was $699 billion of U.S. currency outstanding. • That is $3,134 in currency per adult. • Who is holding all this currency? • Currency held abroad • Currency held by illegal entities

27. The Interest Rate and oldBond Prices $1,000 x .08 = $80 Would get $80 for each of 10 years, then the principal of $1,000 after the last year. [$1,000 x .60 = $60] So there is excess demand for old bonds: You will sell your bond only if you can get $1,333.33. The buyer still gets $80 yearly interest which is a 6% return. [$1,333 x .60 = $80] No one wants to buy your old bond getting only 8%. $1,000 x .10 = $100 You would have to sell your bond at a discount of $800. The buyer is getting $80 or 10%. [$800 x .10 = $80]

28. Bond Prices were on Last years AP TEST • Link

29. History of Deposit Insurance In 1934, federal deposit insurance made its debut at $2,500to protect the average family’s savings and end the bank runsthat had shut down businesses and contributed to the Great Depression. Through the years the coverage rose in $5,000 increments until the 70swhen it jumped to$40,000. In 1980,it was raised to$100,000& in 2008 was raised to $250,000 until Dec. 31, 2009.

30. 1. The most important function of moneyis as a: (unit of account/store of value/medium of exchange). 2. If you are estimating that it will take $5,000to escort Suzie Rah Rahto the prom so that you can demonstrate your talent with the“Econ Rap,”you are using money as a: (unit of account/store of value/medium of exchange). 3. If you place some of your Kroger’s earnings in a safety deposit box so that you can get your boyfriend, Roger Rocket, a pair of roller blades for Christmas, you are using money as a: (unit of account/store of value/medium of exchange). 4. Estimating expenses for A&M at $18,001illustrates money serving as a (unit of account/store of value/medium of exchange). 5. If Suzie Nomicswrites a check for a new Honda, she is using money as a (unit of account/store of value/medium of exchange). 6. M1 [also called transactions money or medium of exchange money or “spendable money”] is comprised of coins, paper money and(gold certificates/checkable deposits). 7. The major component of M1is (currency/checkable deposits). 8. The volume of M1is closer to ($1/$3/$4) trillion. 9. (M1/M2)includes non-checkable savings accounts, MMA’s & TDs under $100,000. 10. (Fiat/Commodity) money is money because the G says that it is[G fiat]. 11. The value of money varies(directly/inversely) with the price level. 12. If the price index increases from 100 to 120, the value of the dollar will fall by (one third/one fifth/one fourth). 13. The money supply is backedby (silver/gold/the government). Money NS 1-13

31. The Federal Reserve

32. Monetary Policy Fed Chairmen The “Fed” Fed Chairman Home of the 7 Board of Governors Ben Bernanke

33. THE FEDERAL RESERVE SYSTEM • The Federal Reserve (Fed) serves as the nation’s central bank. • It is designed to oversee the banking system. • It regulates the quantity of money in the economy. • The Fed was created in 1913 after a series of bank failures convinced Congress that the United States needed a central bank to ensure the health of the nation’s banking system.

34. The Fed’s Organization • Three Primary Functions of the Fed • Regulates banks to ensure they follow federal laws intended to promote safe and sound banking practices. • Acts as a banker’s bank, making loans to banks and as a lender of last resort. • Controlling money supply

35. The Fed’s 25 Branches Fed Quasi-Public Banks.[in combo] Blend of [private ownership (corporations) but public (government)control] The 12 banks are instruments of the government but not owned by the government. The over5,000 banksin the 12 districts buy stock ($1per share) in their district bank (& get 6% dividends [no capital gains]) so the banks are privately owned. Serving the public, it is owned by citizens. The 12 banks are a corporation owned by the banks in their districts, but a public (G) agencydirectly responsible to Congress. They might make $30 billion in one year and turn 90% of that over to the Treasury. The Fed Banks, though they are privately owned, are nonetheless non-profit. Any income in excess of expenses and obligations goes back to the taxpayers. In 2008, they returned $34.9 billion of its income to the taxpayers.

36. 12 Fed Banks and 25 Branches 7th-G-Chicago (1) 8th-H-St. Louis (3) 9th-I-Minneapolis (1) 10th-J-Kansas City (3) 11th-K-Dallas (3) 12th-L-San Francisco (4) 1st-A-Boston (0) 2nd-B-New York (1) 3rd-C-Philadelphia (0) 4th-D-Cleveland (2) 5th-E-Richmond (2) 6th-F-Atlanta (5)

37. Four Part Structure of the Fed Seven Board of Governors • most important body of the Fed • appointed by the Presidentand confirmed by the Senate • 14-year terms are staggered (one replaced each two years) [they arepaid $162,100] • isolationfrom political pressure (only one 14 year term) • the Chairmanserves onlyfour years but can be reappointed [4-year renewable term] 4 times • His pay is $180,100. • Every presidentgets to appoint at least two. Clintonappointed 8 & Bush appointed 4in 1st 2 years. • One term begins every 2 years on Feb. 1 of even numbered years.

38. Kevin Warsh Unexpired term to 1/31/18 Donald Kohn [4 yr term] Vice Chairman to 6/23/10 Ben Bernanke, Chairmanto 1/31/14 [1590 on SAT] Elizabeth Duke Unexpired to 1/31/12 Daniel Tarulla Unexpired to 1/31/22 Vacant Vacant www.federalreserve.gov/BIOS/

39. 2. Federal Open Market Committee [FOMC]This is the Most important ONE!!! You need to remember this. -Fed’s main policy-making arm -includes 7 Board of Governors, NY Fed President who is vice chairman, & is the second most important in the system -The 4 other bank presidents rotate among the other 11 every 3 years. -other 7 bank presidents are non-voting members -they meet every 6 weeks or 8 times a year] -The Fed has primarily used FOMC operations thru 17 primary dealers. The New York Fed publishes the list of primary dealers on its website, along with procedures to become a primary dealer.

40. TheFOMC Meeting RoominWashingtonDC The FOMC meets around a27-foot oval mahogany tablein a room with a23-foot ceilingwith a1,000-pound chandelier. Home of 7 Board of Governors

41. Typical Meeting The entire committee [12 members + other 8 bank presidents] examine regional, national and international economic info to assess the strengths and weaknesses of the economy. After discussing the economy, the voting members vote on the direction of monetary policy. A policy directive describes the committee’sassessment of the economy and the new target fed funds rate. An announcement is made about 1:15 p.m. . A Day In The Life Of The FOMC The Chairman works out on the Fed’s former squash court.

42. Four Part Make-up of the Fed

43. Functions of the Fed – besides researching the economy Destroy/Issue paper notes The Fed clears 40%; Banks clear rest electronically.

44. FED Functions & the Money Supply • Issuing Currency • Setting Reserve Requirements & Holding Reserves • Lending Money to Banks & Thrifts • Providing for Check Collection • Acting as Fiscal Agent • Supervising Banks • Controlling the Money Supply

45. Financial Services Cash Services Electronic Payments Check Processing

46. Store cash and coin Maintain currency’s quality Detect counterfeits Payment Services Cash

47. The Fed handled 42 billion electronic transactions in 2006 Payment Services Electronic forms of Payment

48. The Fed controls the banks’ ability to create new money to ensure the economy doesn’t gettoo much money, nortoo little. Underfed Fed just right Overfed And – so it is with money. Not too much, not too little. 1980 1983 +30% $97.50 $75.00 Money Prices

49. And What Happens If You Feed A Dog too Much

50. Or – it may lead to this!!!