Activator

1. Represents purchasing power, acceptable form of currency, other people will accept it, etc… Activator 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?

2. Jerry Maguire • http://www.youtube.com/watch?v=OaiSHcHM0PA&list=PLD34B596F99A0DE3C&index=9&feature=plpp_video

3. Money and BankingEvolution of Money • Money – most basic of all financial assets, 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

4. Functions of Money • Medium of Exchange – acts as a payment for goods and services; buyers give sellers in exchange for products • Barter system – economy that relies on the exchange of product for product • The direct exchange of goods and services for other goods and services. • Double coincidence of wants – situation where two people simultaneously have a product that the other wants

5. Jail economy video • http://www.youtube.com/watch?v=uvcMvn9azxc&list=PLD34B596F99A0DE3C&index=10&feature=plpp_video

6. Unit of Account • Unit of Account– an expression of value; a way for comparing the values of goods and services • Keep track of debts and investments Fossil – $89.95 Bulova – $399.95 Rolex - $11,995

7. Functions of Money • Store of Value – money holds its value if you decide to store it instead of spend it • Helps people convert purchasing power from present to future value by gaining interest

8. The Kinds of Money • Commodity money – money that has an alternative use as a commodity, which has intrinsic value • Intrinsic value – item would have value if not used as money • Gold, silver, cigarettes (WW2), tulip bulbs (1600’s Europe), etc

9. The Kinds of Money • Fiat – order/decree; government issued money • Paper dollars • Money that is intrinsically worthless • Legal tender - is money that a government has required to be accepted in settlement of debts

10. Functions of Money • Liquidity – ease with which an asset can be converted into money as a medium of exchange • Liquid – checking account • Nonliquid - House

11. Money in the U.S. Economy • Money supply/stock – quantity of money (paper and digital) in the economy • October 2010 – 9.61 Trillion in M1 • Currency – paper bills and coins in the hands of the public (800 Billion) • Demand deposits – balances in bank accounts, that can be accessed by writing a check • Checking accounts, travelers checks

12. Money in the U.S. Economy • M1 – money that people can gain access to easily and immediately; checkable demand deposits. • Highly liquid – physical currency (minted coins and printed paper, demand deposits (checking accounts, traveler’s checks) • M2 – consists of M1 plus accounts that are not as liquid • Slightly less liquid - Savings accounts, certificates of deposits (CDs), money market, mutual funds, etc.

15. Banking

16. Banking

17. The Federal Reserve • The Federal Reserve (“The Fed”) – the central bank of the U.S. • Created in 1913 by Congress, Federal Reserve Act • 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”

18. 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 – Ben Bernanke

19. Structure of the Federal Reserve • Fed is comprised of Twelve Federal District Reserve Banks • One Federal Reserve Bank for each district • Each FRB monitors economic and banking conditions in its district

20. The Fed’s Organization

21. Federal Reserve Bank Atlanta – Atlanta District

23. The Federal Open Market Committee • Structure and function: • Run by the 7 member board of governors (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

25. The Federal Open Market Committee • Power and Influence: • Increase or decrease the $ money $ supply • Open-market operation – buying and selling U.S. government bonds • Increase money supply – buy government bonds from the public (quantitative easing) • Decrease money supply – sell government bonds to the public

26. 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.

27. The Fed is like a dam... • The Fed is like a dam... • The river is the $ supply. • Too much $ causes inflation. • Too little $ can cause a recession. Money Supply Federal Reserve

28. The Fed’s Tools of Monetary Control • Three monetary policy tools • Open-market operations • Reserve requirements • Interest Rates (Federal Funds Rate)

29. Money Supply and Lending

30. Money Supply and Lending

31. Picture This

34. Open-Market Operations • Open-Market Operations – the purchase and sale of U.S. government bonds by the Fed • Most often used tool of the Fed 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

35. 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, contracting the economy, cause inflation to slow, discourage borrowing, encourage saving, restricts the money supply

36. Open-Market Operations Expansionary Monetary Policy Contractionary Monetary Policy

38. Fed Bond Buying • http://www.youtube.com/watch?v=Syk19wfGJRo • http://www.youtube.com/watch?v=8nmTIjbTy3E • http://www.youtube.com/watch?v=YdD1V2CgauY • http://www.youtube.com/watch?v=A3_ymwSDcQQ

39. Brainstorm - FED

40. 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

41. 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.“ (it’s a wonderful life video clip) Modern Bank Runs • 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

42. Money Creation • Required Reserve Ratio – set by the Fed, minimum amount that must be held by the bank • Established by the Federal Reserve, currently 1/10 or 10% of M1 • $1000 deposit, the bank would hold $100 in reserve and have $900 for lending • Required Reserves– the portion/percentage of a money deposit that must be held by the bank • May not be loaned out • Protect the bank against withdrawals on demand deposits • Excess Reserves – bank reserves in excess of the reserve requirement set by the Fed • They are reserves of cash more than the required amounts • May be loaned out or used for withdrawals on demand deposits • Loans - portion of deposit that is loaned out to borrowers • Money supply does not increase until banks actually lend money into circulation

43. Banking Simulation

44. Banking Simulation Total Deposits ___________ Total Reserves ___________ Excess Reserves ___________ Total Loans ___________ Remaining Excess Reserves _______

45. Money Creation • T Account – simplified accounting statement that shows changes in the banks assets and liabilities • Reserves and loans are assets to bank • Deposits are liabilities to the bank

46. Example Assets • Required Reserves: 5,000 • Excess Reserves: 30,000 • Loans: $15,000 Liabilities • Demand Deposits: $50,000 • What is the reserve requirement? • Assume that a withdrawal is made in the amount of $3,000 from the demand deposits. • How much will the reserves change? • Does the M1 money supply change? • As a result of the withdrawal, what is the new value of the excess reserves?

47. Rules for Free Response • 1 pt of extra credit for each correct answer on next test • One copy for me (all names of group) • One copy for you (check your answers) • No phones during free response

48. Money Multiplier • Money multiplier formula – helps determine the amount of money that the banking system generates with each dollar of reserves • MM = 1/RRR • 1/.10 = 10 • 1/.05 = 20 • Money Creation • Initial Cash Deposit (principal) x (MM) • The higher the RRR, the less banks have to loan out (vice versa) • 100(10) = 1000 • 100(20) = 2000

49. Money Multiplier $2000 $200 $1800 $1800 $180 $1620 $162 $1620 $1458 $5420 $542 • Initial Cash Deposit (1 ÷ RRR) • 2000 X 10 = $20,000