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Economics Ms. Harris Chapters 10 and 16

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Presentation on theme: "Economics Ms. Harris Chapters 10 and 16"— Presentation transcript:

1 Economics Ms. Harris Chapters 10 and 16
Money, History of American Banking, Banking Today, The Federal Reserve System & Functions, and Monetary Policy

2 Chapter 10 - Key Terms/Questions, Section 1 – Money – pp 243 - 248
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

3 Barter - Direct exchange of one set of goods or services for another

4 Unit of Account A means for comparing the values of goods/services
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5 Store of Value Something that keeps its value, even if it is stored, rather than used

6 Currency Paper bills and coins used as money

7 Commodity Money Objects that have value in themselves and that are also used as money

8 Representative Money Objects that have value because the holder can exchange them for something else of value

9 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.

10 Why does the United States’ currency have value?
The face value of US currency is decreed by the federal government

11 What are the disadvantages of commodity money?
Disadvantages vary depending on the commodity, but often include lack of portability, durability, or divisibility

12 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

13 “not worth a Continental”

14 What materials would you use if you were creating a new US coin? Why?

15 The History of American Banking - pp 250 – 256
Key Terms/Questions, Ch 10, Sec. 2

16 Bank An institution for receiving, keeping, and lending money

17 National Bank A bank that is chartered, or licensed, by the national government

18 Bank Run Widespread panic in which great numbers of people try to redeem their paper money

19 greenback Paper currency issued during the Civil War

20 Gold Standard A monetary system of which paper money and coins are equal to the value of a certain amount of gold

21 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. 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.

22 Federal Reserve System
The nation’s central banking system

23 Central Bank A bank that can lend to other banks in times of need

24 Member Bank A bank that belongs to the Federal Reserve System

25 Federal Reserve Note The national currency used in the United States today

26 Great Depression The severe economic decline that marked 1929 as its beginning and lasted more than ten years.

27 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 1929 Deposits at FDIC-insured institutions are now insured up to at least $250,000 per depositor through December 31, 2013.

28 What benefits came from adoption of the gold standard in the 1870s?
It 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 gold The public gained confidence in the banking system

29 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 order Thomas Jefferson (Antifederalist) supported a decentralized banking system. The States would establish and regulate all banks within their borders

30 Power 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 banks Power to require banks to hold adequate gold and silver reserves to cover their bank notes Power to issue a single national currency

31 Bank Runs and Panics State-chartered banks often did not keep enough gold and silver to back the paper money that they issued

32 Wildcat Banks Banks located on the edges of settled areas.
Wildcat banks had a high rate of failure

33 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. Anyone who had bought the notes lost their money.

34 Many 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.

35 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

36 Demand Deposit The money in checking accounts

37 Money Market Mutual fund
A fund that pools money from small savers to purchase short-term government and corporate securities .

38 Fractional Reserve Banking
A banking system that keeps only a fraction of funds on hand and lends out the remainder


40 default Failure to pay back a loan

41 mortgage A specific type of loan that is used to buy real estate

42 Credit card A card entitling its holder to buy goods/services based on the holder’s promise to pay for these goods and services

43 interest The price paid for the use of borrowed money

44 Principal The amount of money borrowed

45 Debit Card A card used to withdraw money from an account

46 creditor Person or institution to whom money is owed

47 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

48 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.

49 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

50 Describe the three of the services that banks provide.
Storing money safely Lending money Offering mortgages Issuing credit cards

51 What service is most important to you in choosing a bank ? Why?

52 Economics chapter 16 Sec. 1 – The Federal Reserve System, pp

53 Board of Governors The seven-member board that oversees the Federal Reserve System

54 Monetary Policy The actions the Federal Reserve takes to influence the level of real GDP and the rate of inflation in the economy

55 Federal Reserve Districts
The twelve (12) banking districts created by the Federal Reserve Act

56 Federal Advisory Council (FAC)
The research arm of the Federal Reserve

57 Federal Open Market Committee (FOMC)
Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money supply


59 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.    

60 Sec. 2 – Federal Reserve Functions pp 420 - 423
Economics Chapter 16 Sec. 2 – Federal Reserve Functions pp

61 Which is the Federal Reserve District of Texas?

62 Ch 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

63 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.

64 bank holding company A company that owns more than one bank

65 federal funds rate Interest rate banks charge each other for loans

66 Discount Rate Rate the Federal Reserve charges for loans to commercial banks

67 Net Worth Total assets minus total liabilities

68 The 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 government Regulates the banking industry Regulates the money supply Provides check clearing services Ensures stability in the banking system Stabilizes the economy

69 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

70 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.

71 What factors affect the demand for money?
Cash needed on hand Interest rates Price levels in the economy General level of income

72 Ch 16, Sec. 3 – Monetary Policy Tools – pp 425 - 429
Money Creation The process by which money enters into circulation

73 RRR – Required Reserve Ratio
Ratio of reserves to deposits required of banks by the Federal Reserve

74 Money Multiplier Formula
Amount of new money that will be created with each demand deposit, calculated as 1 divided by RRR

75 excess reserves Reserves greater than the required amounts

76 Prime Rate Rate of interest banks charge on short-term loans to their best customers

77 Open Market Operations
The buying and selling of government securities to alter the supply of money

78 What happens to the money supply when banks loan out more money?
The money supply increases

79 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.

80 Key Terms/Questions, Ch 16,
Section 4 Monetary Policy and Macroeconomic Stabilization pp 430 – 434

81 monetarism The belief that the money supply is the most important factor in macroeconomic policy

82 Monetary policy that increases the money supply
easy money policy Monetary policy that increases the money supply

83 tight money policy Monetary policy that reduces the money supply

84 inside lag Delay in implementing monetary policy

85 outside lag The time it takes for monetary policy to have an effect

86 Why would the Fed enact an easy money policy?
An easy money policy is enacted to increase the money supply and expand the economy

87 Why would the Fed enact a tight money policy?
A tight money policy is enacted to decrease the money supply and contract the economy

88 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

89 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.

90 Banking, 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.

91 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.

92 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.

93 Were 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 caution NO = Some say that banks should have anticipated the long-term effect of holding these reserves

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