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ECON

Designed byAmy McGuire, B-books, Ltd.

McEachern 2010-2011

14

CHAPTERMoney and the Financial System

Macro

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The Evolution of Money

LO1

Properties of the ideal money Durable Portable Divisible Uniform quality Low opportunity cost Relatively stable in value

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Six Properties of Ideal Money

Exhibit 1

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Coins

LO1

Coinage Amount and quality of the

metal By count

Problems Getting clipped Counterfeiting

Token money Face value > cost of coinage Seigniorage – profit from

coinage

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Representative Money and Fiat Money

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Bank notes IOUs Paper money

As good as gold Representative

money Fiat money

From the power of the state

Legal tender

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The Value of Money

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Purchasing power of money Rate of exchange for goods and

services Higher price level in economy

Smaller purchasing power Purchasing power of $ in a year

100 ÷Price index in same year Evolution over time

Steady decline since 1960

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When Money Performs Poorly

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Hyperinflation in Zimbabwe Prices grow by the hour

Not reliable store of value Exchange for stable

currency Barter

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Financial Institutions in the U.S.

LO2

Depository institutions Commercial banks

Loans to businesses Thrift institutions

Savings banks Credit unions Loans to households

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The Fed

LO3

1913 Federal Reserve System– Central bank– Monetary authority– 12 Federal Reserve districts

National banks– Had to join the Fed

State banks– Voluntary membership to the

Fed

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The Twelve Federal Reserve Districts

The map shows by color the area covered by each of the 12 Federal Reserve districts. Black dots note the locations of the Federal Reserve Bank in each district. Identified with a star is the Board of Governors headquarters in Washington, D.C.

LO3Exhibit 3

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The Fed

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Powers of the Fed– Issue bank notes– Buy and sell government

securities– Extend loans to member banks– Clear checks in the banking

system– Reserve requirement for member

banks Banker’s bank

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LO4

Board of Governors– 7 members

• Appointed by the President• Confirmed by the Senate• 14-year nonrenewable term• Insulated from political pressure• 1 chair: 4 years

– Set and implement monetary policy– Oversees the 12 reserve banks

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Federal Open Market Committee FOMC– Open-market operations

• The Fed buys, sells government securities

– 7 board governors– 5 presidents of reserve banks– Advise the board

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Regulating the money supply– Open-market operations– Discount rate– Reserve requirements

Deposit insurance– Federal Deposit Insurance

Corporation, FDIC• $250,000 per depositor per bank• 90% banks

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Large number of U.S. banks– Past restrictions on bank branches

Branching restrictions– Inefficiencies– Bank failures (Great Depression)

Bank holding company– Owns several banks– Offers other services

Bank mergers– Expand geographically

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Number of Commercial Banks Declined over the Last Two Decades, but the Number of

Branches Continues to Grow

LO4Exhibit 7

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Largest U.S. Banks Based on Total Domestic Deposits

LO4Exhibit 8(a)

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World’s Largest Banks Based on Total Assets

LO4Exhibit 8(b)