1. Chapter 18 Money and the Federal Reserve System
Lecture Slides
Survey of Economics Irvin B. Tucker
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

2. What will I learn in this chapter?
The three functions of money, definitions of money, and organization and services of the Federal Reserve System
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3. What is barter?
The direct exchange of one good for another good, rather than for money
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4. What is the problem with barter?
It requires a coincidence of wants and results in wasting time trying to make transactions
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

5. What is money?
Anything that serves as a medium of exchange, unit of account, and store of value
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

6. What is the advantage of money?
The use of money simplifies and therefore increases market transactions
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

7. What are the functions of money?
Medium of exchange
Unit of account
Store of value
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8. What is a medium of exchange?
The primary function of money to be widely accepted in exchange for goods and services
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9. What is a unit of account?
The function of money to provide a common measurement of the relative value of goods and services
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

10. The ability of money to hold value over time
What is a store of value?
The ability of money to hold value over time
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

11. Are credit cards money?
No, credit cards fail to meet the store-of-value criterion and are therefore not money
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

12. What does it mean that money is liquid?
It is available to spend in exchange for goods and services without any additional expense
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

13. What is another desirable property of money?
The supply of money must be great enough to meet ordinary transactions needs, but not be so plentiful that it becomes worthless
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

14. What are other properties of money?
Money must be …
portable
divisible
uniform
acceptable
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

15. What is commodity money?
Anything that serves as money while having market value in other uses
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

16. 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
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

17. What is fiat money?
Money accepted by law and not because of redeemability or intrinsic value
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

18. What are money supply definitions?18
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

19. What is M1? The narrowest definition of the money supply.
M1 = currency + checkable deposits.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

20. What is currency? Money, including coins and paper money
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

21. 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
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

22. What is M2?
The definition of the money supply that equals M1 plus near monies
M2 = M1 + savings deposits + small time deposits of less than $100,000
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

23. What distinguishes M1 from M2?
M1 is more liquid than M2
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

24. Savings and Small Time Deposits 69%
Exhibit 1 Definitions of the Money Supply, 2011
Checkable Deposits 54% M1
Currency 46%
$2,174 billion
Small time deposit 8%
M1 23%
Savings and Small Time Deposits % M2
$9,640 billion
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

25. What is the Federal Reserve System (the Fed)?
The 12 Federal Reserve district banks that service banks and other financial institutions within each of the Federal Reserve districts
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

26. Exhibit 2 The Twelve Federal Reserve Districts26
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

27. What is the Board of Governors of the Fed?
The seven members appointed by the President and confirmed by the U.S. Senate who serve for one nonrenewable 14-year term
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

28. Exhibit 3 The Organization of the Federal Reserve System28
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

29. What is the responsibility of the Fed Board of Governors ?
To supervise and control the money supply and the U.S. banking system
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

30. 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
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

31. Chairman of the Board of Governors of the Fed
Who is Ben Bernanke?
Chairman of the Board of Governors of the Fed
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

32. What is the Federal Advisory Council?
12 prominent commercial bankers who advise board members, but who do not have voting rights
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

33. What is the purpose of the FOMC?
To increase the money supply if we have unemployment and decrease it if we have inflation
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

34. What is the Federal Open Market Committee (FOMC)?
The FOMC is the Fed’s committee that directs the buying and selling of U.S. government securities
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

35. What percent of all deposits reside in member banks?
About 70%
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

36. Exhibit 4 Top 10 Banks in the United States, 2011
Assets
, ,500 2,000 2,500
(billions of dollars)
Metlife
HSBC
Citigroup
Wells Fargo
Morgan Stanley
Bank o f NY
JPMorgan Chase
Bank of America
Goldman Sachs
U.S. Bankcorp 36
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

37. 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
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

38. What is the Federal Deposit Insurance Corporation (FDIC)?
The FDIC is a government agency established in 1933 to insure commercial bank deposits up to a specified limit
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

39. 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
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

40. END
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted, in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.