EconomicsMs. Harris

Chapters 10 and 16

Money, History of American Banking,

Banking Today, The Federal Reserve

System & Functions, and Monetary Policy

Chapter 10 - Key Terms/Questions, Section 1 – Money – pp 243 - 248

Money – anything that serves as A medium of exchange, A unit of account, and A store of value

Medium of exchange – anything that is used to determine value during the exchange of goods/services for another

Barter - Direct exchange of one set of goods or services for another

Unit of Account A means for comparing the values of goods/services

2009 Cadillac Escalade 2009 Kia Rio

Hybrid - $73,135 $11,495

Store of Value

Something that keeps its value, even if it is stored, rather than used

Currency

Paper bills and coins used as money

Commodity Money

Objects that have value in themselves and that are also used as money

Representative Money

Objects that have value because the holder can exchange them for something else of value

Fiat Money

A fiat is an order or decree Fiat money is money that has value

because a government has decreed it is an acceptable means to pay debts.

Why does the United States’ currency have value?

The face value of US currency is decreed by the federal government

What are the disadvantages of commodity money?

Disadvantages vary depending on the commodity, but often include lack of portability, durability, or divisibility

What is a Continental and why did Continentals become worthless?

Representative money (bills) issued by Congress to finance the war against England.

The federal government could not tax the people and the reserve held very little gold or silver. People came to believe that they could not exchange their Continentals for gold and silver coins

“not worth a Continental”

What materials would you use if you were creating a new US coin? Why?l

The History of American The History of American Banking - pp 250 – 256Banking - pp 250 – 256

• Key Terms/Questions, Ch 10,Key Terms/Questions, Ch 10, Sec. 2Sec. 2

Bank Bank

•An institution for An institution for receiving, keeping, and receiving, keeping, and lending moneylending money

National BankNational Bank

•A bank that is chartered, or A bank that is chartered, or licensed, by the national licensed, by the national governmentgovernment

Bank Bank RunRun

• Widespread panic in Widespread panic in which great numbers of which great numbers of people try to redeem people try to redeem their paper moneytheir paper money

greenbackgreenback

•Paper currency issued during Paper currency issued during the Civil Warthe Civil War

Gold StandardGold Standard

• A monetary A monetary system of system of which paper which paper money and money and coins are coins are equal to the equal to the value of a value of a certain certain amount of amount of goldgold

Gold Standard - notesGold Standard - notes

• The gold standard was replaced by The gold standard was replaced by fiat currency, whereby the fiat currency, whereby the government or central bank is government or central bank is ultimately responsible for the value ultimately responsible for the value of the money. of the money.

• Until 1971, the U.S. dollar was fixed Until 1971, the U.S. dollar was fixed to the price of gold. Many to the price of gold. Many economists feel that reverting to the economists feel that reverting to the gold standard would  quell inflation gold standard would  quell inflation because of the fixed value feature. because of the fixed value feature.

Federal Reserve SystemFederal Reserve System

• The nation’s central banking The nation’s central banking systemsystem

Central BankCentral Bank

•A bank that can lend to A bank that can lend to other banks in times of needother banks in times of need

Member BankMember Bank

•A bank that belongs to A bank that belongs to the Federal Reserve the Federal Reserve SystemSystem

Federal Reserve NoteFederal Reserve Note

•The national currency used The national currency used in the United States todayin the United States today

Great DepressionGreat Depression

• The severe economic decline The severe economic decline that marked 1929 as its that marked 1929 as its beginning and lasted more beginning and lasted more than ten years.than ten years.

Federal Deposit Insurance Federal Deposit Insurance Corporation Corporation <http://www.fdic.gov/><http://www.fdic.gov/>

• The FDIC insures bank deposits in The FDIC insures bank deposits in order to ease the danger of order to ease the danger of depositors’ losing money, as depositors’ losing money, as happened after the stock market happened after the stock market collapse in 1929collapse in 1929

• Deposits at FDIC-insured Deposits at FDIC-insured institutions are now insured up to institutions are now insured up to at least $250,000 per depositor at least $250,000 per depositor through December 31, 2013.through December 31, 2013.

What benefits came What benefits came from adoption of from adoption of the gold standard the gold standard

in the 1870s?in the 1870s?• It set a definite value for the It set a definite value for the

dollar -- one ounce of gold = $20dollar -- one ounce of gold = $20• Government was limited to Government was limited to

printing notes only up to the printing notes only up to the value of the limited supply of goldvalue of the limited supply of gold

• The public gained confidence in The public gained confidence in the banking systemthe banking system

Analyze the different views of Analyze the different views of Alexander Hamilton and Thomas Alexander Hamilton and Thomas Jefferson concerning the creation Jefferson concerning the creation

of a national bankof a national bank • Hamilton (Federalist) believed the Hamilton (Federalist) believed the

country needed a strong central country needed a strong central government to establish economic government to establish economic and social orderand social order

• Thomas Jefferson (Antifederalist) Thomas Jefferson (Antifederalist) supported a decentralized supported a decentralized banking system. The States banking system. The States would establish and regulate all would establish and regulate all banks within their bordersbanks within their borders

List the three powers List the three powers endowed upon the federal endowed upon the federal

government by the government by the National Banking acts of National Banking acts of

1863 and 1864.1863 and 1864.•Power to charter banksPower to charter banks•Power to require banks to hold Power to require banks to hold

adequate gold and silver adequate gold and silver reserves to cover their bank reserves to cover their bank notesnotes

•Power to issue a single Power to issue a single national currencynational currency

Bank Runs and PanicsBank Runs and Panics

• State-chartered banks often State-chartered banks often did not keep enough gold and did not keep enough gold and silver to back the paper money silver to back the paper money that they issuedthat they issued

Wildcat BanksWildcat Banks• Banks located on the edges Banks located on the edges

of settled areas. of settled areas. • Wildcat banks had a high Wildcat banks had a high

rate of failurerate of failure

Fraud Fraud

• A few banks engaged A few banks engaged in out-and-out fraud in out-and-out fraud (or cheating). They (or cheating). They issued bank notes, issued bank notes, collected gold and collected gold and silver money from silver money from customers who bought customers who bought the notes, and then the notes, and then disappeared. disappeared.

• Anyone who had Anyone who had bought the notes lost bought the notes lost their money.their money.

Many different Many different currenciescurrencies

• State-chartered banks – as well as cities, State-chartered banks – as well as cities, private banks, railroads, stores, churches, private banks, railroads, stores, churches, and individuals – were allowed to issue and individuals – were allowed to issue currency. currency.

• A dollar issued by the “City of Atlanta” may A dollar issued by the “City of Atlanta” may not be worth the same as a dollar issued by not be worth the same as a dollar issued by “City of New York.” Many notes were “City of New York.” Many notes were counterfeit or worthless imitations of real counterfeit or worthless imitations of real notes.notes.

Ch 10, Section 3 – Banking Ch 10, Section 3 – Banking Today – pp 258 – 264Today – pp 258 – 264

money supplymoney supply All of the money available in All of the money available in

the United States economythe United States economy

LiquidityLiquidity The ability to be used The ability to be used

as, or directly converted as, or directly converted to cashto cash

Demand DepositDemand Deposit The money in checking accountsThe money in checking accounts

Money Market Mutual Money Market Mutual fundfund

A fund that pools money from small A fund that pools money from small savers to purchase short-term savers to purchase short-term government and corporate securitiesgovernment and corporate securities

.

Fractional Reserve Fractional Reserve BankingBanking

A banking system that keeps only a A banking system that keeps only a fraction of funds on hand and lends out fraction of funds on hand and lends out the remainderthe remainder

defaultdefault

Failure to pay Failure to pay back a loanback a loan

mortgagemortgage

A specific type of loan that is used to buy A specific type of loan that is used to buy real estatereal estate

Credit cardCredit card

A card entitling its holder to buy A card entitling its holder to buy goods/services based on the holder’s goods/services based on the holder’s promise to pay for these goods and promise to pay for these goods and servicesservices

interestinterest

The price paid for the use of borrowed The price paid for the use of borrowed moneymoney

Principal Principal

The amount of money borrowedThe amount of money borrowed

Debit CardDebit Card

A card used to withdraw money A card used to withdraw money from an accountfrom an account

creditorcreditor

Person or Person or institution institution to whom to whom money is money is owedowed

What is the difference between What is the difference between M1 and M2 money? Give an M1 and M2 money? Give an

example of eachexample of each.. M1 includes all money M1 includes all money

that is immediately that is immediately accessible for people accessible for people to use. Examples: to use. Examples: cash, money in cash, money in checking accounts, checking accounts, and traveler’s checksand traveler’s checks

What is the difference between M1 and M2 money? What is the difference between M1 and M2 money? Give an example of each. - continuedGive an example of each. - continued

M2 includes all of M2 includes all of M1 plus all assets M1 plus all assets that are easily that are easily transferred into transferred into M1. Examples: M1. Examples: savings account savings account deposits, deposits, certificates of certificates of deposit, and deposit, and money market money market mutual funds.mutual funds.

How is a debit card How is a debit card different from a credit different from a credit card?card?

A debit card withdraws A debit card withdraws money directly from a money directly from a checking or savings checking or savings accountaccount

When a credit card is When a credit card is used for a purchase, it used for a purchase, it functions as a loan functions as a loan that needs to be paid that needs to be paid

Describe the three of the Describe the three of the services that banks services that banks provide.provide.

Storing money Storing money safelysafely

Lending moneyLending money Offering mortgagesOffering mortgages Issuing credit cardsIssuing credit cards

What service is most What service is most important to you in important to you in choosing a bank ? choosing a bank ? Why?Why?

Economics chapter 16

Sec. 1 – The Federal Reserve System, pp 415-419

Board of Governors

The seven-member board that oversees the Federal Reserve System

Monetary Policy

The actions the Federal Reserve takes to influence the level of real GDP and the rate of inflation in the economy

Federal Reserve Districts

The twelve (12) banking districts created by the Federal Reserve Act

Federal Advisory Council (FAC)

The research arm of the Federal Reserve

Federal Open Market Committee (FOMC)

Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money supply

FOMC

Who serves on the Board of Governors of the Federal Reserve?

Seven members – usually economists from business, academia, or government

Appointed by the President of the United States with approval of a majority of the Senate

A full term is fourteen years.

   

Economics Chapter 16

Sec. 2 – Federal Reserve Functions pp 420 - 423

Which is the Federal Reserve District of Texas?

#11

Ch 16, Section 2 – Federal Reserve Functions -- pp 420 - 423

Check Clearing – the process by which banks record whose account gives up money and whose account receives money when a customer writes a check

Check Clearing -- Notes The check as a payment method is being replaced over time

by electronic forms of payment, such as credit cards, debit cards and online account transfers.

Nearly all the checks the Federal Reserve Banks process for collection are now received as electronic check images.

Regardless of whether checks are cleared as paper or electronic images, financial institutions have several alternative ways to receive payment for, or clear, checks deposited with them.

In line with the electronification of check processing and the downward trend in the use of checks as a payment method, the Federal Reserve Banks are reducing the number of their check processing centers.

bank holding company

A company that owns more than one bank

federal funds rate

Interest rate banks charge each other for loans

Discount Rate

Rate the Federal Reserve charges for loans to commercial banks

Net Worth

Total assets minus total liabilities

List the advantages of having the Fed oversee the regulation of the banking system?

The Fed provides banking and fiscal services to the federal government

Regulates the banking industry Regulates the money supply Provides check clearing services Ensures stability in the banking system Stabilizes the economy

What do bank examiners do?

Bank examiners work for the Federal Reserve and other regulatory agencies. They examine banks periodically to make sure that each institution is obeying laws and regulations

What do bank examiners do if a bank has loans that will not be repaid?

They can force the bank to sell risky investments or to declare loans that will not be repaid as losses.

What factors affect the demand for money?

Cash needed on hand Interest rates Price levels in the economy General level of income

Ch 16, Sec. 3 – Monetary Policy Tools – pp 425 - 429

Money Creation The process

by which money enters into circulation

RRR – Required Reserve Ratio

Ratio of reserves to deposits required of banks by the Federal Reserve

Money Multiplier Formula

Amount of new money that will be created with each demand deposit, calculated as 1 divided by RRR

excess reserves

Reserves greater than the required amounts

Prime Rate

Rate of interest banks charge on short-term loans to their best customers

Open Market Operations

The buying and selling of government securities to alter the supply of money

What happens to the money supply when banks loan out more money?

The money supply increases

Why do banks sometimes hold excess reserves?

These excess reserves ensure that banks will always be able to meet their customers’ demands and the Fed’s reserve requirements.

Key Terms/Questions, Ch 16,

Section 4

Monetary Policy and Macroeconomic Stabilization

pp 430 – 434

monetarism

The belief that the money supply is the most important factor in macroeconomic policy

easy money policy

Monetary policy that increases the money supply

tight money policy

Monetary policy that reduces the money supply

inside lag

Delay in implementing monetary policy

outside lag

The time it takes for monetary policy to have an effect

Why would the Fed enact an easy money policy?

An easy money policy is enacted to increase the money supply and expand the economy

Why would the Fed enact a tight money policy?

A tight money policy is enacted to decrease the money supply and contract the economy

What are inside lags, and why do they occur?

An inside lag is a delay in implementing monetary policy. Inside lags occur because it takes time to determine how the economy is performing. During the delay, economists are gathering and analyzing data to decide how to react and form an economic policy

Why does monetary policy have such long outside lags?

Outside lags may be long because they mainly affect business investment plans.

Firms may take months or years to make and carry out these plans.

Banking, Monetary Policy, and the Great Depression - Page 435

1. What action did President Roosevelt take in order to stop the banking panic in 1933? FDR declared a bank “holiday.” All banks closed

temporarily to stop the banking panic.

What does the Federal Deposit Insurance Corporation do?

The FDIC insures bank deposits. If a bank failed, the deposits would be guaranteed by the federal government.

Why did the Federal Reserve raise reserve requirements in 1937?

The Fed feared that banks might distribute their excess reserves to their depositors, causing inflation.

Were banks justified in holding excess reserves in the 1930s? Why, or why not?

The banks held the reserves because of the recent banking panics.

YES = Some think that banks were justified to use caution

NO = Some say that banks should have anticipated the long-term effect of holding these reserves