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

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Presentation on theme: "Explorations in Economics Alan B. Krueger & David A. Anderson."— Presentation transcript:

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 Govt Spending Projects due Thursday 1/23. – Questions: Mr. G or see after class. Test on fiscal and monetary policy 1/29. Read Modules Do review and assessment. 6/12/2014Chapter 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 moneys 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. 6/12/2014Chapter 16-Mods 47-49

8 A Brief History of Money British Museum - A brief history of money 6/12/2014Chapter 16-Mods As you listen to the video, write down the different types of money. And think about what all forms of money have in common.

9 THE BASIS OF MONEYS 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 1700s to 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. 6/12/2014Chapter 16-Mods 47-49

11 Housekeeping Govt Spending Projects due Thursday 1/23. – Questions: Mr. G or see after class. Test on fiscal and monetary policy 1/29. Read Modules Do review and assessment. 6/12/2014Chapter 16-Mods 47-49

12 Objectives Cover characteristics of money. Measures of money. How banks create money. Intro to Federal Reserve 6/12/2014Chapter 16-Mods 47-49

13 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 CHARACTERISTICS OF MONEY

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 travelers 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 travelers checks.

16 Activity Classify different types of money as M-1 or M-2. 6/12/2014Chapter 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. 6/12/2014Chapter 16-Mods 47-49

18 MODULE 48: THE BANKING SYSTEM KEY IDEA: The varied depository institutions (banks) in our banking system dont 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 6/12/2014Chapter 16-Mods OweOwn $ 100 checking account $ 10 cash $ 90 loans 1. Joanna deposits money in her bank account 2. Bank keeps some money in reserve in case depositor withdraws. 3. Bank lends remaining money to companies and consumers.

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). 1.First bank will start with a $100 deposit. 2.Bank sets up 10% reserve. 3.First bank lends to first borrower 90% of their deposits. 4.Borrow deposits their loan in the next bank. 5.Repeat process until you reach the end. 6/12/2014Chapter 16-Mods 47-49

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

25 Exit Ticket Money self assessment. 6/12/2014Chapter 16-Mods 47-49


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