Section 1: What is Money? Section 2: The Federal Reserve System

Section 1: What is Money? Main Idea: People are willing to accept money in exchange for goods. Functions and Types of Money Money has 3 functions: 1. it serves as a medium, or form, of exchange. For example we can exchange money for goods and services. 2. Money serves as a store of value. We can hold our money until we are ready to use it. 3. Money is like a measuring stick that can be used to assign value to a good or service.

Types of Money According to economists, “Money is anything that people are willing to accept in exchange for goods.” Today we use coins ( nickels, dimes, pennies, etc…) and currency, which includes paper money and coins.

What gives money value? We accept the value of money because we are 100% sure that someone will accept its value as well. In other words we have confidence in the value of money. A $10 bill only costs cents to make and has no alternative use, so without the confidence in the $10 bill it would be useless to us.

The Financial System Main Idea: Financial institutions give people a safe place to deposit their money or take out loans. When you make a deposit at a financial institute they take your money and put it to work. For example, they lend it to other people or businesses. Financial institutes make money by charging businesses and people interest to use your money.

Commercial Banks These are financial institutes that offer full banking services. Most people have their checking and savings accounts in commercial banks Examples: BB&T, Wachovia, RBC, Bank of America, etc….

Savings and loan associations (S&L) These are institutions that traditionally loaned money to people buying homes. Today they offer many of the services that commercial banks do.

Credit Unions Non-profit basis Open only to members of the group that sponsors them. Credit unions offer better rates on savings and loans. For example, SECU

The FDIC(Federal Deposit Insurance Corporation) The FDIC was created after the banking disaster of the 1920s. The purpose of the FDIC is to safeguard your money up to $250,000. This figure recently changed in 2008 after the financial crisis we suffered. It originally covered only 100,000. So if you have up to $250,000 in a bank and it goes out of business, the FDIC will give you that money. If you have more you lose the rest.

Section 2: The Federal Reserve System personal_finance/ personal_finance/ The central bank of the United States is the Federal Reserve System. When I need money I go to a bank, when a bank needs money they go the Fed. They Federal Reserve System is divided into 12 districts. Each district has a main Federal Reserve Bank, along with branch banks. Member banks are owners of the Fed b/c they buy stock in the Fed and earn dividends.

The Board of Governors The Fed was created in 1913 by Woodrow Wilson The purpose of the Board of Governors was to prevent the large banks that invested in the Fed from becoming too influential. The President appoints and the Senate confirms seven members of the Board of Governors. The Fed has several advisory councils that report on the general condition of the economy, financial institutions, and consumer loans.

Functions of the Fed Main idea: The Fed controls the money supply, serves as the government’s central bank, and watches over the banking industry. Jobs of the Fed: 1. The fed is a regulator. For example if two large banks want to merge, the fed must make sure it will not hurt competition. 2. Acting as the Government’s bank. It holds the government’s money. It allows them to draw on their accounts. They sell bonds to allow the gov’t to borrow money. They also manage the nations’ currency.

Monetary Policy The Fed has the power to increase and decrease the flow of money in the United States. How? 3 ways: 1. Changing the interest rate. If the Fed wants to constrict the money supply they simply increase the interest rate, making it more expensive to get a loan. This works both ways. 2. Changing the discount rate. The discount rate is the rate the Fed charges member banks for loans. If they want to increase the money supply they can lower this rate and it will be cheaper for banks to get money to loan out to us.

Monetary Policy continued…. 3. Changing the reserve rate. The reserve rate is the amount of money a bank must keep in their vaults at all times. If the fed wants to decrease the money supply, they just need to increase the reserve rate. This would cause the banks to loan out less money.