1 Chapter 24 Money and the Federal Reserve System Key Concepts Key Concepts Summary Summary Practice Quiz Internet Exercises Internet Exercises ©2002 South-Western College Publishing

2 What is barter? The direct exchange of one good for another good, rather than for money

3 What is the problem with barter? It requires a coincidence of wants

4 What is money? Anything that serves as a medium of exchange, unit of account, and store of value

5 What is the advantage of money? The use of money simplifies and therefore increases market transactions

6 What are the functions of money? Medium of exchange Unit of account Store of value

7 What is a medium of exchange? The primary function of money to be widely accepted in exchange for goods and services

8 What is a unit of account? The function of money to provide a common measurement of the relative value of goods and services

9 What does it mean that money is liquid? It is available to spend in exchange for goods and services without any additional expense

10 Are credit cards money? No, credit cards fail to meet the store-of- value criterion and are therefore not money

11 What is the best level of scarcity for money ? The supply of money must be great enough to meet ordinary transactions needs, but not be so plentiful that it becomes worthless

12 What are other properties of money? Money must be … portable divisible uniform acceptable

13 What is commodity money? Anything that serves as money while having market value in other uses

14 Is our money backed up by gold or silver? No, our paper money was exchangeable for gold until 1934, and in 1963 Congress removed the right to exchange $1 bills for silver

15 What is fiat money? Money accepted by law and not because of redeemability or intrinsic value

16 What makes our dollar bills fiat money? All our bills claim that “This note is legal tender for all debts public and private”

17 What does legal tender mean? Legally dollar bills cannot be refused as payment for a debt

18 What is currency? Money, including coins and paper money

19 What are checkable deposits? The total of checking account balances in financial institutions convertible to currency “on demand” by writing a check without advance notice

20 What is M1? The narrowest definition of the money supply. It includes currency, traveler’s checks, and checkable deposits

21 What is M2? The definition of the money supply that equals M1 plus near monies, such as savings deposits and small time deposits of less than $100,000

22 What is M3? The definition of the money supply that equals M2 plus large time deposits of $100,000 or more

23 What distinguishes M1 from M2 and M3? M1 is more liquid than M2 or M3

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27 What is the federal reserve system? The 12 central banks that service banks and other financial institutions within each of the Federal Reserve districts

28 What is the Board of Governors of the Fed? The seven members appointed by the President and confirmed by the U.S. Senate

29 How long does a board member serve? They serve for a non-renewable fourteen-year term

30 What is the responsibility of the board? To supervise and control the money supply and the banking system of the U.S.

31 What is the chairman of the Board of Governors? The President designates one member of the Board to serve as chair for a renewable four-year term

32 Who is Alan Greenspan? Chairman of the Board of Governors of the Fed

33 What is the Federal Open Market Committee? The FOMC is the Fed’s committee that directs the buying and selling of U.S. government securities

34 What is the purpose of the FOMC? To increase the money supply if we have unemployment and decrease it if we have inflation

35 What is the Federal Advisory Council? 12 prominent commercial bankers who council board members but who do not have voting rights

36 What percent of all deposits reside in member banks? About 70%

37 Board of Governors Regional Fed Banks U.S. Banking System The Fed’s Organization

38 What does a Federal Reserve Bank do? Controls the money supply Clears checks Supervises and regulates banks Maintains and circulates currency Protects consumers Maintains federal government checking accounts and gold

39 What is the Federal Deposit Insurance Corporation? The FDIC is a government agency established in 1933 to insure commercial bank deposits up to a specified limit

40 What is the Monetary Control Act? A 1980 law that gave the Fed greater control of nonmember banks and makes all financial institutions more competitive

41 Key Concepts

42 Key Concepts What is barter? What is money? What are the functions of money? What does it mean that money is liquid? What are other properties of money? What is commodity money? Is our money backed up by gold or silver?

43 Key Concepts cont. What is fiat money? What is currency? What is M1? What is M2? What is M3? What is the Federal Reserve System? What is the Board of Governors?

44 Key Concepts cont. What is the Chairman of the Board of Governors?What is the Chairman of the Board of Governors? What is the Federal Open Market Committee?What is the Federal Open Market Committee? What is the Federal Advisory Council? What does a Federal Reserve Bank do? What is the Federal Deposit Insurance Corporation (FDIC)?What is the Federal Deposit Insurance Corporation (FDIC)?

45 Summary

46 Money can be anything that meets these three tests. Money must serve as (1) a medium of exchange, (2) a unit of account, and (3) a store of value. Money facilitates more efficient exchange than barter. Other desirable properties of money include scarcity, portability, divisibility, and uniformity.

47 Medium of exchange is the most important function of money. This means that money is widely accepted in payment for goods and services.

48 Unit of account is another important function of money. Money is used to measure relative values by serving as a common yardstick for valuing goods and services.

49 Store of value is the property of money to hold its value over time. Money is said to be highly liquid, which means it is readily usable in exchange.

50 Credit cards are not money. Credit cards represent a short- term loan and therefore fail as a store of value.

51 Commodity money is money that has a marketable value, such as gold and silver. Today, the U.S. uses fiat money, which must be accepted by law, but is not convertible into gold, silver, or any commodity.

52 M1 is the narrowest definition of money, which equals currency plus traveler’s checks plus checkable deposits.

53 M2 is a broader definition of money, which equals M1 plus near monies, such as savings deposits and small time deposits.

54 M3 is an even broader definition of money, which equals M2 plus large time deposits of more than $100,000 or more.

55 END