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CHAPTER 10
ECONOMICS, MR. VIOLANTI
Money, Banking, and the Federal Reserve System
What is Money???
A History of Money, Part ONEDeveloped through history
Barter System: Trade, many difficulties A medium of exchange was needed
What gives money value?
General acceptability, and scarcity.Money lowers transaction costs over a barter
economy.
Three Functions of Money Medium of Exchange Unit of Account Store of Value
Beginnings of Banking: Transportation of Gold, issue paper receipts. Leads to FRACTIONAL RESERVE BANKING.
The Money Supply
Money Supply (M1) consists of 3 components Currency (coins, paper money) Checking Accounts Traveler’s Checks
August, 2005: $710 Billion currency in circulation, $619 Checking Accounts, $7 traveler’s checks
Near Money: Savings accounts, non-checking bank accounts
Credit Cards are considered loansUS Dollar Symbology
US Currency
Federal Reserve System
1913, Congress passes the Federal Reserve Act Sets up Federal Reserve System, “The Fed” Central Bank, chief monetary authority
Central Bank determines: Determines Money Supply Supply economy with Federal Reserve Notes (Money) Holds Bank reserves Supervises Banks Lender of Last Resort
12 Federal Reserve District Banks
Role of Banks in Money SupplyReserve account + Vault Cash = total
reserves Required Reserve Excess Reserves
They “create” money through Checking Accounts Loans of existing deposits
Role of FED in changing Money Supply
1. Changing the Reserve Requirement RR MS RR MS
2. Open Market Operations Buy Gov. Securities MS Sell Gov. SecuritiesMS
3. Changing the Discount Rate IR MS IR MS