Money and the Federal Reserve System Economics for

Money and the Federal Reserve System Economics for Today by Irvin Tucker, 6 th edition © 2009 South-Western College Publishing 1

What will I learn in this chapter? The three functions money, definitions of money, and organization and services of the Federal Reserve System 2

What puzzles will I learn to solve? § Why do nations use money? § Is “plastic money” real money? § What does the Federal Reserve do? 3

What is barter? The direct exchange of one good for another good, rather than for money 4

What is the problem with barter? It requires a coincidence of wants 5

What is money? Anything that serves as a medium of exchange, unit of account, and store of value 6

What is the advantage of money? The use of money simplifies and therefore increases market transactions 7

What are the functions of money? • Medium of exchange • Unit of account • Store of value 8

What is a medium of exchange? The primary function of money to be widely accepted in exchange for goods and services 9

What is a unit of account? The function of money to provide a common measurement of the relative value of goods and services 10

What does it mean that money is liquid? It is available to spend in exchange for goods and services without any additional expense 11

Are credit cards money? No, credit cards fail to meet the store-ofvalue criterion and are therefore not money 12

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 13

What are other properties of money? Money must be … • portable • divisible • uniform • acceptable 14

What is commodity money? Anything that serves as money while having market value in other uses 15

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 16

What is fiat money? Money accepted by law and not because of redeemability or intrinsic value 17

What makes our dollar bills fiat money? All our bills claim that “This note is legal tender for all debts public and private” 18

What does legal tender mean? Legally dollar bills cannot be refused as payment for a debt 19

What is currency? Money, including coins and paper money 20

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 21

What is M 1? The narrowest definition of the money supply. It includes currency, traveler’s checks, and checkable deposits 22

What is M 2? The definition of the money supply that equals M 1 plus near monies, such as savings deposits and small time deposits of less than $100, 000 23

What distinguishes M 1 from M 2? M 1 is more liquid than M 2 24

25

26

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

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

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

What is the responsibility of the board? To supervise and control the money supply and the banking system of the U. S. 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 31

Who is Ben Bernanke? Chairman of the Board of Governors of the Fed 32

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 33

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

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

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

The Fed’s Board of Governors Organization Regional Fed Banks U. S. Banking System 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 38

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 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 40

END 41