MONEY & BANKING FEDERAL RESERVE MONETARY POLICY MONEY & BANKING FEDERAL RESERVE

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Money & Banking Money Fiat/Legal Tender – money that has value because a government fiat, or order, has established it as acceptable for payment of debts. Medium of Exchange – use of money in exchange for goods or services. Measure of Value – use of money as a yardstick for comparing the values of goods and services in relation to one another. Store of Value – use of money to store purchasing power for later use.

Money & Banking Banking Interest Rate – amount of money the borrower must pay for the use of someone else’s money. Expressed in a percentage. Prime Rate – rate of Interest banks charge on loans to their best business customers. Loans – money that is given with the idea that it will be paid in return. Collateral – something of value that a borrower lets the lender claim if a loan is not repaid.

Money & Banking Credit Unions – depository institution owned & operated by its members to provide savings accounts & low interest loans to its members. Savings & Loans – depository institution that, like a commercial bank, accepts deposits & lends money.

FEDERAL RESERVE Federal Reserve (FED) created by Congress in 1913 to “provide for a safer and more flexible banking and monetary system.”

FEDERAL RESERVE FED – 12 Districts – each served by one bank, divided into territories. What district is NC in?

FEDERAL RESERVE FED decisions do not have to be ratified by President or Congress. Appointments to the Board of Governors – President appoints – Congress approves. FED reports to Congress on its policies. How is the concept of checks and balances seen here?

Purpose of the FED – control nation’s money supply. FEDERAL RESERVE Purpose of the FED – control nation’s money supply. Tight Monetary Policy – makes credit expensive and in short supply in an effort to slow the economy. (Contraction) To stop inflation Loose Monetary Policy – makes credit inexpensive & abundant, to increase money in circulation. To avoid a recession How does the FED show that the USA has a mixed economy?

FEDERAL RESERVE Goal of the FED – balance the need to create long-term growth in the economy – more jobs, consumer goods, continuing higher standard of living – with the need to avoid inflation (higher prices).

FEDERAL RESERVE How do you think the Fed will try to manipulate the economy?

Tools of the Federal Reserve Discount Rate – the amount of interest that commercial banks pay the FED for borrowed funds. Banks in turn set their lending rates for companies, individuals, home mortgages, and auto loans. Reserve Requirement – the amount of money banks must hold as security for loans. The higher the requirement, the less money banks have to loan. (expressed in a %) Buying & Selling Government Securities – bonds and loans the government has received from private individuals and banks.