Presentation on theme: "Money and the Banking System"— Presentation transcript:
1Money and the Banking System Macro Chapter 13Money and the Banking System
26 Learning Goals List and describe the functions of money Define the alternative measures of money and distinguish between M1 and M2Explain fractional reserve bankingInvestigate how banks create money by extending loansList the tools used by the Fed to control the money supplyAnalyze how those tools change the money supply
43 functions of moneyMedium of exchangeStore of valueUnit of account
5Optional video about money titled “History Channel US Mints- paper and coin production” Look for the following:When and why the federal government started printing moneyWhere the US Mint locations areWhere the Bureau of Engraving and Printing has locationsHow much currency is printed and where it is
72 Measures of MoneyM1 = most liquid assets, i.e. cash or the easiest to turn in to cashM2 = less liquid, but still able to turn in to cashdemand deposits = checking accounts; can get your money “on demand”Credit cards are NOT money!
9Optional video about banks titled “History Channel Banks-Banking history” Look for the following:When and where was the first bank formed in the US?How did Bank of America get started?When were credit cards first created and how did they change to the way they are today?
10Explanation of fractional reserve banking Watch Video: FTC80_03-fractional reserve banking
11Example of bank run:Watch Video: It’s a Wonderful Life-bank run
12Q13.1 If you have a checking account at a local bank, your bank account there is an asset to the bank and an asset to you.a liability of the bank and a liability of yours.a liability of the bank and an asset to you.an asset to the bank and a liability of yours.
13Typical assets and liabilities of banks: Vault cashReserves at the FedLoans to customersBonds (i.e. securities)Liabilities:Checking depositsSavings depositsBorrowings
15Explanation of money creation process: Watch video “FTC80_03-money creation process”
16Here’s how excess reserves are used to “create” money: See files “deposit creation.pdf” and “deposit multiplier.pdf”
17Key points:(1) Banks are required to keep a portion of their deposits as reserves at the Federal Reserve BankThese are required reservesRoughly equal to 10% of deposits(2) Banks may keep or loan out additional reservesThese are excess reservesExcess reserves earn interest from the Federal Reserve, so the bank must decide where it’s earning the biggest return- by loaning them out or by keeping them with the Fed
18Q13. 2 Suppose you withdraw $1,000 from your checking account Q13.2 Suppose you withdraw $1,000 from your checking account. If the reserve requirement is 20 percent, how does this transaction affect the supply of money and the excess reserves of your bank?There is no change in the supply of money; your bank's excess reserves are reduced by $800.There is no change in the supply of money; your bank's excess reserves are reduced by $200.The money supply increases by $1,000, and the excess reserves of your bank are reduced by $800.The money supply increases by $1,000, and the excess reserves of your bank are reduced by $200.
19Q13. 3 (MA) Suppose you deposit $1,000 into your checking account Q13.3 (MA) Suppose you deposit $1,000 into your checking account. If the reserve requirement is 10 percent, what impact does this transaction have?The money supply increasesThe money supply remains the sameThe bank’s required reserves increase by $100The bank’s required reserves decrease by $100The bank’s required reserves increase by $900The bank can make new loans of $900The bank can make new loans of $1,000
21A quick look at the Fed:Watch video Catch Me If You Can- check routing
22Four tools of the Fed to control the money supply: Reserve requirementsOpen Market OperationsExtend loansInterest paid on excess and required reserves
23Expansionary Monetary Policy: Buy securities (i.e. bonds, Treasury or other)Extend more loansReduce the interest rate paid on reserves
24Restrictive Monetary Policy: Sell securities (i.e. bonds, Treasury or other)Extend fewer loansIncrease the interest rate paid on reserves
25Q13.4 If the Fed lends to member banks, what happens to reserves and the money supply? Reserves increase and the money supply decreases.Both increase.Reserves decrease and the money supply increases.Both decrease.
26Open market operations is the key tool the Fed uses Open market operations is the buying and selling of bonds, usually US Treasury securities
27Class Activity: Let’s see how this works Copy this activity into your notes. I think it will be helpful to study later.Watch video: Macro Chapter 13 content- Fed buys bonds
28Bank: (make up your own name) Assets Liabilities + Net WorthRequired Reserves DepositsExcess ReservesBonds Net WorthLoansTotal Total
29Results: New excess reserves at your bank = $100 Impact on money supply = $100 / 0.10 =$1,000
30Q13.5 (MA) When the Fed sells Treasury Bonds on the open market, it will tend to increase the money supplydecrease the money supplyincrease interest ratesdecrease interest rates
31Q13.6 (MA) When the Fed buys Treasury Bonds on the open market, it will tend to increase the money supplydecrease the money supplyincrease interest ratesdecrease interest rates