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2. 10
Section 1
The Origins of Money
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3. What’s It Like Living in a Barter Economy?
trade goods and services
makes trade time consuming.
Money reduces Transaction costs
Time
Efficiency
variety
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4. 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.
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5. What Gives Money Value? Cash Acceptable Legal tender Divisible durable
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6. What Are the Three Functions of Money?
Medium of exchange
Store of value
Unit of account
See Exhibit 10-1.
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7. Who Were the Early Bankers?
Gold
Goldsmith = first bankers
Issue receipts of deposits
Lend out receipts, collecting interest on loans
CREATED FRACTIONAL BANKING SYSTEM
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8. 10
Section 2
The Money Supply
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9. 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.
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10. 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
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11. 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.
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12. 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
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13. The Federal Reserve System10
Section 3
The Federal Reserve System
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14. 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)
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15. Exhibit 10-3 from the Student Text
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16. 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
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17. What Does the Fed Do? (cont.)
Provide check-clearing services.
Supervises member banks
Lender of last resort
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18. The Money Creation Process10
Section 4
The Money Creation Process
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19. 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
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20. Fed Tools for Changing the Money Supply10
Section 5
Fed Tools for Changing the Money Supply
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21. 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
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22. Exhibit 10-7 from the Student Text
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23. 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.
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24. 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.
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