1. Money Its origin: –Barter didn’t work, so money became a store of value. We all agree on the rules of the game (like monopoly), so we ‘buy in’ to the idea that a seemingly worthless piece of paper will have a certain value. –The first type of money was specie money. It had actual value as a precious metal – probably gold. –Then, government put their stamp on the money, being able to control how much of it was out there. This type of money is called fiat money

2. Inconvertible fiat money The U.S. dollar is inconvertible (can’t convert your money to a precious metal at a fed. reserve bank). So why does our currency have value?

3. What are some characteristics of an efficient money? It should be –Divisible –Portable –Durable How does our currency measure up?

4. How do banks make money? They use depositors’ money to loan to others (plus interest, of course) –Car loans, house, business, credit cards… What if all of their money is loaned out? They borrow money from the Federal Reserve Bank – the ‘Central Bank’ of the United States.

5. The Federal Reserve must constantly choose between two evils: Inflation and Recession –By adding to the money supply, it attempts to incentivize spending / borrowing (expansion) –By holding back the money supply, it attempts to de-incentivize spending / borrowing (contraction) ~How does it do this? Let’s see:

6. Interest Rates Discount Rate = the percentage rate the FED offers its member banks (currently 0.75%) –By lowering the %, the FED encourages borrowing (loose money policy) This sometimes leads to inflation –By raising the %, the FED discourages borrowing (tight money policy) This stagnates spending/borrowing and can cause recession

7. Prime Rate = the percentage rate banks offer their best customers (currently 3.25%) –Banks offer “Prime +” to most of their customers Mortgage loans = 5.5 – 7.5% Car loans = 6 – 9% Credit Cards = 12 – 29% –If there is collateral involved, the % will be lower –Also involves your credit rating / FICO score, earnings, and ‘character’. »Let’s look at your worksheet to see how you measure up Interest Rates (cont.)

8. Will the bank lend $ to me? Do you have a job? –If you can prove that you have consistent income which would allow you to make payments on a loan, then generally, yes…they will loan you money. But it’s a big risk for them, so it all depends on how much you need and for what! If you need the money for something that retains value (durable good), then they are more apt to say yes b/c they can take it from you and sell it if you stop paying. If you need it for a $200 pair of jeans, a weekend trip to Cabo, and a plane ticket, then…not so much.

9. Will the bank lend $ to me? Do you have collateral? –If you have “assets” (cash in the bank, stocks, a car, house, a gold bar buried in the yard), then the bank is more confident that you’ll be able to pay back the loan, even if you lose your job. (or you could go and pawn your collateral goods on ‘Pawn Stars’ )

10. Will the bank lend $ to me? Do you have a good credit history? –Your FICO score is like your reputation…once it is tarnished, it’s hard to repair. –If you make payments on- time, don’t “max out” your credit card, don’t open too many credit cards, your credit score will go up. Excellent Credit (750+) Good Credit (700-749) Fair Credit (650-699) Poor Credit (600-649) Bad Credit (Below 599) No Credit/Limited Credit

11. Other ways the Fed. tries to manipulate the financial system: Reserve Requirement: Banks use your money to make money, but… Banks must keep a certain percentage of their depositors’ money “in the vault”. (currently 10%) –By limiting the amount of money banks can use to invest (raising the reserve req.), the FED basically restricts the money supply, causing the econ. to slow. –By lowering the reserve requirement, the FED is allowing the money supply to increase, causing the economy to expand.

12. Open Market Operations The Fed. Sells Treasury Bonds (and other federal securities) = pulling money out of circulation (fights inflation) The Fed. Buys Treasury Bonds = putting money into circulation (spurs inflation)

13. Moral Suasion Press releases, announcements, testimony by Fed. Chairperson that may influence banking policies. –Ex: Fed. Announces that inflation is on the rise and it may raise interest rates. This would cause banks to restrict loans or be more cautious.

14. What else does the FED do? Enforce consumer legislation Clear checks Maintain currency and coins

15. Monetary Policy Review: How does the Gov/Treasury Dept. and the Federal Reserve incentivize and/or inhibit inflation? In other words, how do they react to indicators in order to stabilize the financial system? ~See Worksheet~