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10 Section 1 The Origins of Money © EMC Publishing, LLC

What’s It Like Living in a Barter Economy? trade goods and services makes trade time consuming. Money reduces Transaction costs Time Efficiency variety © EMC Publishing, LLC

How and Why Did Money Come to Exist? Money is any good that most people will accept in exchange for goods and services and in the repayment of debt. gold, silver, copper, rocks, cattle, shells, and more. © EMC Publishing, LLC

What Gives Money Value? Cash Acceptable Legal tender Divisible durable © EMC Publishing, LLC

What Are the Three Functions of Money? Medium of exchange Store of value Unit of account See Exhibit 10-1. © EMC Publishing, LLC

Who Were the Early Bankers? Gold Goldsmith = first bankers Issue receipts of deposits Lend out receipts, collecting interest on loans CREATED FRACTIONAL BANKING SYSTEM © EMC Publishing, LLC

10 Section 2 The Money Supply © EMC Publishing, LLC

What Are the Components of the Money Supply? A money supply is the total supply of money in circulation. currency, checking accounts, and traveler’s checks. known as M1. © EMC Publishing, LLC

Exhibit 10-2 from the Student Text The most basic money supply (M1) consists of three things: 1. Currency—coins and paper money 2. Checking accounts 3. Traveler’s checks © EMC Publishing, LLC

Moving Beyond M1 to M2 M2 is a broader measure of money supply. It includes everything in M1 plus savings deposits, small-denomination time deposits, money market deposit accounts, retail money market mutual fund accounts. A savings account is an interest-earning account. Some savings accounts have check-writing privileges and other do not. © EMC Publishing, LLC

Borrowing, Lending, and Interest Rates Why do interest rates rise and fall? Interest rates are determined in the loanable funds market, which is a market for loans. SUPPLY/DEMAND FOR LOANABLE FUNDS © EMC Publishing, LLC

The Federal Reserve System 10 Section 3 The Federal Reserve System © EMC Publishing, LLC

What Is the Federal Reserve System? 1913 Federal Reserve Act. Federal Reserve System, FRS, The Fed central bank of the United States. Board of Governors of the Federal Reserve System 12 Districts Federal Open Market Committee (FOMC) Open market operations (buy and sell bonds) © EMC Publishing, LLC

Exhibit 10-3 from the Student Text © EMC Publishing, LLC

What Does the Fed Do? The Fed has six major responsibilities: Control the money supply. Supply the economy with paper money, or Federal Reserve notes. printed at the Bureau of Engraving and Printing in Washington, D.C. Hold bank reserves © EMC Publishing, LLC

What Does the Fed Do? (cont.) Provide check-clearing services. Supervises member banks Lender of last resort © EMC Publishing, LLC

The Money Creation Process 10 Section 4 The Money Creation Process © EMC Publishing, LLC

Different Types of Reserves Banks have three types of reserves: total, Required excess. Total reserves can be divided into two types: required and excess. Fed sets reserve requirement(rr) Multiplier = 1/rr © EMC Publishing, LLC

Fed Tools for Changing the Money Supply 10 Section 5 Fed Tools for Changing the Money Supply © EMC Publishing, LLC

Changing the Reserve Requirement The Fed has four tools that it can use to raise or lower the money supply. the reserve requirement: required cash on hand from each deposit open market operations: buy and sell government securities the federal funds rate target: rates banks charge each other when one bank borrows from another the discount rate: rate FED charges banks when they borrow from the FED (Discount Window) Quantitative Easing (QE): buying bad securities, increasing the money supply to slow the Great Recession © EMC Publishing, LLC

Exhibit 10-7 from the Student Text © EMC Publishing, LLC

The Discretion of the Fed The Fed has the power today to increase and decrease the money supply of the country by any amount, even a large amount. Some economists argue that this kind of power can be abused. It would be better, they say, if the Fed had to abide by some monetary rule. © EMC Publishing, LLC

A Gold Standard A gold standard could be used as a monetary rule. A gold standard would require the government to determine the price for gold and vow to buy and sell gold at that set price. Under a gold standard, as the market price of gold goes up and down, so do the prices of other goods and services. The gold standard could stabilize the value of the dollar in terms of what a dollar can purchase. © EMC Publishing, LLC