Presentation on theme: "Economics Ms. Harris Chapters 10 and 16 Money, History of American Banking, Banking Today, The Federal Reserve System & Functions, and Monetary Policy."— Presentation transcript:
Economics Ms. 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 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 Banking - pp 250 – 256 Key Terms/Questions, Ch 10, Sec. 2Key Terms/Questions, Ch 10, Sec. 2
Bank An institution for receiving, keeping, and lending moneyAn institution for receiving, keeping, and lending money
National Bank A bank that is chartered, or licensed, by the national governmentA bank that is chartered, or licensed, by the national government
Bank Run Widespread panic in which great numbers of people try to redeem their paper moneyWidespread panic in which great numbers of people try to redeem their paper money
greenback Paper currency issued during the Civil WarPaper currency issued during the Civil War
Gold Standard A monetary system of which paper money and coins are equal to the value of a certain amount of goldA monetary system of which paper money and coins are equal to the value of a certain amount of gold
Gold Standard - notes The gold standard was replaced by fiat currency, whereby the government or central bank is ultimately responsible for the value of the money.The 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.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.
Federal Reserve System The nation’s central banking systemThe nation’s central banking system
Central Bank A bank that can lend to other banks in times of needA bank that can lend to other banks in times of need
Member Bank A bank that belongs to the Federal Reserve SystemA bank that belongs to the Federal Reserve System
Federal Reserve Note The national currency used in the United States todayThe national currency used in the United States today
Great Depression The severe economic decline that marked 1929 as its beginning and lasted more than ten years.The severe economic decline that marked 1929 as its beginning and lasted more than ten years.
Federal Deposit Insurance Corporation Federal Deposit Insurance Corporation The FDIC insures bank deposits in order to ease the danger of depositors’ losing money, as happened after the stock market collapse in 1929The FDIC insures bank deposits in order to ease the danger of depositors’ losing money, as happened after the stock market collapse in 1929 Deposits at FDIC-insured institutions are now insured up to at least $250,000 per depositor through December 31, 2013.Deposits at FDIC-insured institutions are now insured up to at least $250,000 per depositor through December 31, 2013.
What benefits came from adoption of the gold standard in the 1870s? It set a definite value for the dollar -- one ounce of gold = $20It set a definite value for the dollar -- one ounce of gold = $20 Government was limited to printing notes only up to the value of the limited supply of goldGovernment was limited to printing notes only up to the value of the limited supply of gold The public gained confidence in the banking systemThe public gained confidence in the banking system
Analyze the different views of Alexander Hamilton and Thomas Jefferson concerning the creation of a national bank Hamilton (Federalist) believed the country needed a strong central government to establish economic and social orderHamilton (Federalist) believed the country needed a strong central government to establish economic and social order Thomas Jefferson (Antifederalist) supported a decentralized banking system. The States would establish and regulate all banks within their bordersThomas Jefferson (Antifederalist) supported a decentralized banking system. The States would establish and regulate all banks within their borders
List the three powers endowed upon the federal government by the National Banking acts of 1863 and Power to charter banksPower to charter banks Power to require banks to hold adequate gold and silver reserves to cover their bank notesPower to require banks to hold adequate gold and silver reserves to cover their bank notes Power to issue a single national currencyPower to issue a single national currency
Bank Runs and Panics State-chartered banks often did not keep enough gold and silver to back the paper money that they issuedState-chartered banks often did not keep enough gold and silver to back the paper money that they issued
Wildcat Banks Banks located on the edges of settled areas.Banks located on the edges of settled areas. Wildcat banks had a high rate of failureWildcat banks had a high rate of failure
Fraud A 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.A 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. Anyone who had bought the notes lost their money.
Many different currencies State-chartered banks – as well as cities, private banks, railroads, stores, churches, and individuals – were allowed to issue currency.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.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.
Ch 10, Section 3 – Banking Today – pp 258 – 264 money supply All of the money available in the United States economy Liquidity The ability to be used as, or directly converted to cash
Demand Deposit The money in checking accounts
Money Market Mutual fund A fund that pools money from small savers to purchase short-term government and corporate securities.
Fractional Reserve Banking A banking system that keeps only a fraction of funds on hand and lends out the remainder
default Failure to pay back a loan
mortgage A specific type of loan that is used to buy real estate
Credit card A card entitling its holder to buy goods/services based on the holder’s promise to pay for these goods and services
interest The price paid for the use of borrowed money
Principal The amount of money borrowed
Debit Card A card used to withdraw money from an account
creditor Person or institution to whom money is owed
What 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
What 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.
How is a debit card different from a credit card? A debit card withdraws money directly from a checking or savings account When a credit card is used for a purchase, it functions as a loan that needs to be paid
Describe the three of the services that banks provide. Storing money safely Lending money Offering mortgages Issuing credit cards
What service is most important to you in choosing a bank ? Why?
Economics chapter 16 Sec. 1 – The Federal Reserve System, pp
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
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
Which is the Federal Reserve District of Texas? # 11
Ch 16, Section 2 – Federal Reserve Functions -- pp 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 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.
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 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