Explorations in Economics

1. Explorations in Economics Alan B. Krueger & David A. Anderson

2. Chapter 16: Money, Banking, and Financial Markets • Module 47: What is Money? • Module 48: The Banking System • Module 49: The Role of Financial Markets in the Real Economy

3. Housekeeping • Gov’t Spending Projects due Thursday 1/23. • Questions: email Mr. G or see after class. • Test on fiscal and monetary policy 1/29. • Read Modules 47-48. Do review and assessment. Chapter 16-Mods 47-49

4. MODULE 47:WHAT IS MONEY? KEY IDEA: Money is a medium of exchange, a store of value, and a unit of account. OBJECTIVES: • To identify the functions of money. • To describe the characteristics of money. • To explain the sources of money’s value. • To describe the money supply.

5. THE FUNCTIONS OF MONEY Money can be anything that is widely accepted in exchange for goods and services. Money simplifies business transactions by serving as a medium of exchange, a store of value, and a unit of account. Barter is the exchange of goods or services for other goods or services without the use of money. Barter limits choices. Currency is paper money and coins. Demand deposits are the money held in checking accounts at a bank.

6. THE FUNCTIONS OF MONEY A medium of exchange is something people acquire for the purpose of payment for goods and services. A store of value is something that can be saved and will hold its value relatively well over time. A unit of account is a standard measure used to set prices and make economic calculations.

7. Student Experience • In your uses of money chart, write an example of how you have used money for its three purposes. Chapter 16-Mods 47-49

8. A Brief History of Money British Museum - A brief history of money As you listen to the video, write down the different types of money. And think about what all forms of money have in common. Chapter 16-Mods 47-49

9. THE BASIS OFMONEY’S VALUE Commodity money is money that has value apart from its use as money. Many precious items were used in the past, but problems means we cannot use today. Representative money has no value of its own but can be exchanged for something of value. Gold and Silver certificates were issued from 1700’s to 1971. US had to hold large reserves of the metals. Fiat money has value because the government has ordered that it be accepted in payment of debts. People accept Federal Reserve Notes because they have faith in the government.

10. Do Now – Fiscal Policy Worksheet Review your worksheet and update: • Make sure you say whether taxes are going up or down in each scenario. • Make sure you do the same for spending. Chapter 16-Mods 47-49

11. Housekeeping • Gov’t Spending Projects due Thursday 1/23. • Questions: email Mr. G or see after class. • Test on fiscal and monetary policy 1/29. • Read Modules 47-48. Do review and assessment. Chapter 16-Mods 47-49

12. Objectives • Cover characteristics of money. • Measures of money. • How banks “create” money. • Intro to Federal Reserve Chapter 16-Mods 47-49

13. CHARACTERISTICS OF MONEY Durable and Portable Light enough to carry but sturdy Uniform and Divisible Easily recognized as money How do we pay $5.87? Limited in Supply and Accepted for Payment Too much in circulation causes it to lose value We know that it is acceptable in exchange for goods or services

14. THE MONEY SUPPLY TODAY The money supply is the amount of money available for the purchase of goods and services. M1 is a measure of the money supply that includes only the forms of money that are readily available to spend: cash, checking account deposits, and traveler’s checks. M2 is a measure of the money supply that includes M1 along with forms of money that are less easily converted to cash. Savings accounts, called Time Deposits would be less liquid than cash.

15. THE MONEY SUPPLY TODAY M1 is a measure of the money supply that includes only the forms of money that are readily available to spend: cash, checking account deposits, and traveler’s checks.

16. Activity • Classify different types of money as M-1 or M-2. Chapter 16-Mods 47-49

17. Summary • What is money – three purposes • How money has evolved. Type of money we use today is……. • Characteristics of money. • How we measure money: M-1, and M-2. Chapter 16-Mods 47-49

18. MODULE 48:THE BANKING SYSTEM KEY IDEA: The varied depository institutions (“banks”) in our banking system don’t just hold money; they create money, but not by making new currency. OBJECTIVES: • To explain how depository institutions create money in the economy. • To describe key aspects of the regulatory system for depository institutions.

19. THE BANKING INDUSTRY A depository institution is a financial institution that obtains money mainly through deposits from clients. A commercial bank accepts deposits from individuals and firms, and provides them with loans in addition to a wide variety of other services.

20. THE FUNCTIONS OF DEPOSITORY INSTITUTIONS Depository institutions have three primary functions in common: Storing money: a safe place to keep money Lending money: car and home loans, lines of credit for businesses Issuing credit cards: cardholders make purchases with a “loan”

21. How Banks Work 2. Bank keeps some money in reserve in case depositor withdraws. Own Owe 1. Joanna deposits money in her bank account $ 10 cash $ 100 checking account $ 90 loans 3. Bank lends remaining money to companies and consumers. Chapter 16-Mods 47-49

22. FRACTIONAL RESERVEBANKING AND THE RESERVE REQUIREMENT In a fractional reserve banking system, banks must hold on to a fraction of their deposits and may lend out the rest. A reserve requirement specifies the percentage of deposits that banks must hold as reserves. The FED sets the rates for the legal reserves. Excess reserves are the source of loans and the money creation function of the banking system.

23. Banking Experiment • Each row will represent an economy. • Alternating students will represent banks or borrowers (consumers or companies). • First bank will start with a $100 deposit. • Bank sets up 10% reserve. • First bank lends to first borrower 90% of their deposits. • Borrow deposits their loan in the next bank. • Repeat process until you reach the end. Chapter 16-Mods 47-49

24. HOW DEPOSITORY INSTITUTIONS CREATE MONEY Deposit, lending, spending…

25. Exit Ticket • Money self assessment. Chapter 16-Mods 47-49