Presentation on theme: "Economics Ms. Harris Chapters 10 and 16"— Presentation transcript:
1Economics Ms. Harris Chapters 10 and 16 Money, History of American Banking, Banking Today, The Federal Reserve System & Functions, and Monetary Policy
2Chapter 10 - Key Terms/Questions, Section 1 – Money – pp 243 - 248 Money – anything that serves asA medium of exchange,A unit of account, andA store of valueMedium of exchange – anything that is used to determine value during the exchange of goods/services for another
3Barter - Direct exchange of one set of goods or services for another
4Unit of Account A means for comparing the values of goods/services 2009 Cadillac Escalade Kia RioHybrid - $73, $11,495
5Store of ValueSomething that keeps its value, even if it is stored, rather than used
7Commodity MoneyObjects that have value in themselves and that are also used as money
8Representative MoneyObjects that have value because the holder can exchange them for something else of value
9Fiat 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.
10Why does the United States’ currency have value? The face value of US currency is decreed by the federal government
11What are the disadvantages of commodity money? Disadvantages vary depending on the commodity, but often include lack of portability, durability, or divisibility
12What 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
14What materials would you use if you were creating a new US coin? Why?
15The History of American Banking - pp 250 – 256 Key Terms/Questions, Ch 10, Sec. 2
16BankAn institution for receiving, keeping, and lending money
17National BankA bank that is chartered, or licensed, by the national government
18Bank RunWidespread panic in which great numbers of people try to redeem their paper money
19greenbackPaper currency issued during the Civil War
20Gold StandardA monetary system of which paper money and coins are equal to the value of a certain amount of gold
21Gold Standard - notesThe gold standard was replaced by fiat currency, whereby the government or central bank is ultimately responsible for the value of the money.Until 1971, the U.S. dollar was fixed to the price of gold. Many economists feel that reverting to the gold standard would quell inflation because of the fixed value feature.
22Federal Reserve System The nation’s central banking system
23Central BankA bank that can lend to other banks in times of need
24Member BankA bank that belongs to the Federal Reserve System
25Federal Reserve NoteThe national currency used in the United States today
26Great DepressionThe severe economic decline that marked 1929 as its beginning and lasted more than ten years.
27Federal Deposit Insurance Corporation <http://www.fdic.gov/> The FDIC insures bank deposits in order to ease the danger of depositors’ losing money, as happened after the stock market collapse in 1929Deposits at FDIC-insured institutions are now insured up to at least $250,000 per depositor through December 31, 2013.
28What benefits came from adoption of the gold standard in the 1870s? It set a definite value for the dollar -- one ounce of gold = $20Government was limited to printing notes only up to the value of the limited supply of goldThe public gained confidence in the banking system
29Analyze the different views of Alexander Hamilton and Thomas Jefferson concerning the creation of a national bankHamilton (Federalist) believed the country needed a strong central government to establish economic and social orderThomas Jefferson (Antifederalist) supported a decentralized banking system. The States would establish and regulate all banks within their borders
30Power to issue a single national currency List the three powers endowed upon the federal government by the National Banking acts of 1863 and 1864.Power to charter banksPower to require banks to hold adequate gold and silver reserves to cover their bank notesPower to issue a single national currency
31Bank Runs and PanicsState-chartered banks often did not keep enough gold and silver to back the paper money that they issued
32Wildcat Banks Banks located on the edges of settled areas. Wildcat banks had a high rate of failure
33FraudA few banks engaged in out-and-out fraud (or cheating). They issued bank notes, collected gold and silver money from customers who bought the notes, and then disappeared.Anyone who had bought the notes lost their money.
34Many different currencies State-chartered banks – as well as cities, private banks, railroads, stores, churches, and individuals – were allowed to issue currency.A dollar issued by the “City of Atlanta” may not be worth the same as a dollar issued by “City of New York.” Many notes were counterfeit or worthless imitations of real notes.
35Ch 10, Section 3 – Banking Today – pp 258 – 264 money supplyAll of the money available in the United States economyLiquidityThe ability to be used as, or directly converted to cash
45Debit CardA card used to withdraw money from an account
46creditorPerson or institution to whom money is owed
47What is the difference between M1 and M2 money? Give an example of each. M1 includes all money that is immediately accessible for people to use. Examples: cash, money in checking accounts, and traveler’s checks
48What is the difference between M1 and M2 money? Give an example of each. - continued M2 includes all of M1 plus all assets that are easily transferred into M1. Examples: savings account deposits, certificates of deposit, and money market mutual funds.
49How is a debit card different from a credit card? A debit card withdraws money directly from a checking or savings accountWhen a credit card is used for a purchase, it functions as a loan that needs to be paid
50Describe the three of the services that banks provide. Storing money safelyLending moneyOffering mortgagesIssuing credit cards
51What service is most important to you in choosing a bank ? Why?
52Economics chapter 16Sec. 1 – The Federal Reserve System, pp
53Board of GovernorsThe seven-member board that oversees the Federal Reserve System
54Monetary PolicyThe actions the Federal Reserve takes to influence the level of real GDP and the rate of inflation in the economy
55Federal Reserve Districts The twelve (12) banking districts created by the Federal Reserve Act
56Federal Advisory Council (FAC) The research arm of the Federal Reserve
57Federal Open Market Committee (FOMC) Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money supply
59Who serves on the Board of Governors of the Federal Reserve? Seven members – usually economists from business, academia, or governmentAppointed by the President of the United States with approval of a majority of the SenateA full term is fourteen years.
60Sec. 2 – Federal Reserve Functions pp 420 - 423 Economics Chapter 16Sec. 2 – Federal Reserve Functions pp
61Which is the Federal Reserve District of Texas? #11
62Ch 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
63Check 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.
64bank holding companyA company that owns more than one bank
65federal funds rateInterest rate banks charge each other for loans
66Discount RateRate the Federal Reserve charges for loans to commercial banks
68The Fed provides banking and fiscal services to the federal government List the advantages of having the Fed oversee the regulation of the banking system?The Fed provides banking and fiscal services to the federal governmentRegulates the banking industryRegulates the money supplyProvides check clearing servicesEnsures stability in the banking systemStabilizes the economy
69What 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
70What 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.
71What factors affect the demand for money? Cash needed on handInterest ratesPrice levels in the economyGeneral level of income
72Ch 16, Sec. 3 – Monetary Policy Tools – pp 425 - 429 Money CreationThe process by which money enters into circulation
73RRR – Required Reserve Ratio Ratio of reserves to deposits required of banks by the Federal Reserve
74Money Multiplier Formula Amount of new money that will be created with each demand deposit, calculated as 1 divided by RRR
75excess reservesReserves greater than the required amounts
76Prime RateRate of interest banks charge on short-term loans to their best customers
77Open Market Operations The buying and selling of government securities to alter the supply of money
78What happens to the money supply when banks loan out more money? The money supply increases
79Why 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.
85outside lagThe time it takes for monetary policy to have an effect
86Why would the Fed enact an easy money policy? An easy money policy is enacted to increase the money supply and expand the economy
87Why would the Fed enact a tight money policy? A tight money policy is enacted to decrease the money supply and contract the economy
88What 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
89Why 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.
90Banking, Monetary Policy, and the Great Depression - Page 435 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.
91What 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.
92Why did the Federal Reserve raise reserve requirements in 1937? The Fed feared that banks might distribute their excess reserves to their depositors, causing inflation.
93Were banks justified in holding excess reserves in the 1930s 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 cautionNO = Some say that banks should have anticipated the long-term effect of holding these reserves