Section 1: What is Money?Section 2: The Federal Reserve System

Section 1: What is Money?Main Idea: People are willing to accept

money in exchange for goods.

Functions and Types of Money Money has 3 functions:1. it serves as a medium, or form, of exchange.

For example we can exchange money for goods and services.

2. Money serves as a store of value. We can hold our money until we are ready to use it.

3. Money is like a measuring stick that can be used to assign value to a good or service.

Types of MoneyAccording to economists, “Money is anything

that people are willing to accept in exchange for goods.”

Today we use coins ( nickels, dimes, pennies, etc…) and currency, which includes paper money and coins.

What gives money value?We accept the value of money because we

are 100% sure that someone will accept its value as well. In other words we have confidence in the value of money.

A $10 bill only costs cents to make and has no alternative use, so without the confidence in the $10 bill it would be useless to us.

The Financial SystemMain Idea: Financial institutions give

people a safe place to deposit their money or take out loans.

When you make a deposit at a financial institute they take your money and put it to work. For example, they lend it to other people or businesses.

Financial institutes make money by charging businesses and people interest to use your money.

Commercial BanksThese are financial institutes that offer full

banking services. Most people have their checking and savings

accounts in commercial banksExamples: BB&T, Wachovia, RBC, Bank of

America, etc….

Savings and loan associations (S&L)These are institutions that traditionally

loaned money to people buying homes. Today they offer many of the services that

commercial banks do.

Credit UnionsNon-profit basisOpen only to members of the group that

sponsors them.Credit unions offer better rates on savings

and loans.

For example, SECU

The FDIC(Federal Deposit Insurance Corporation)The FDIC was created after the banking

disaster of the 1920s. The purpose of the FDIC is to safeguard your

money up to $250,000.This figure recently changed in 2008 after the

financial crisis we suffered. It originally covered only 100,000.

So if you have up to $250,000 in a bank and it goes out of business, the FDIC will give you that money. If you have more you lose the rest.

Section 2: The Federal Reserve Systemhttp://www.msnbc.msn.com/id/7089510/ns/bu

siness-personal_finance/The central bank of the United States is the

Federal Reserve System.When I need money I go to a bank, when a bank

needs money they go the Fed. They Federal Reserve System is divided into 12

districts. Each district has a main Federal Reserve Bank, along with branch banks.

Member banks are owners of the Fed b/c they buy stock in the Fed and earn dividends.

The Board of Governors The Fed was created in 1913 by Woodrow WilsonThe purpose of the Board of Governors was to

prevent the large banks that invested in the Fed from becoming too influential.

The President appoints and the Senate confirms seven members of the Board of Governors.

The Fed has several advisory councils that report on the general condition of the economy, financial institutions, and consumer loans.

Functions of the FedMain idea: The Fed controls the money

supply, serves as the government’s central bank, and watches over the banking industry.

Jobs of the Fed:1. The fed is a regulator. For example if two large

banks want to merge, the fed must make sure it will not hurt competition.

2. Acting as the Government’s bank. It holds the government’s money. It allows them to draw on their accounts. They sell bonds to allow the gov’t to borrow money. They also manage the nations’ currency.

Monetary PolicyThe Fed has the power to increase and decrease the

flow of money in the United States. How?3 ways:1. Changing the interest rate. If the Fed wants to

constrict the money supply they simply increase the interest rate, making it more expensive to get a loan. This works both ways.

2. Changing the discount rate. The discount rate is the rate the Fed charges member banks for loans. If they want to increase the money supply they can lower this rate and it will be cheaper for banks to get money to loan out to us.

Monetary Policy continued….3. Changing the reserve rate. The reserve

rate is the amount of money a bank must keep in their vaults at all times. If the fed wants to decrease the money supply, they just need to increase the reserve rate. This would cause the banks to loan out less money.