Unit 7 Money Banking and Monetary Policy According

Unit 7 Money, Banking, and Monetary Policy According to your textbook on page 492, the ideal money should have 7 characteristics? What are they? And do you think our “money” fulfills those 7 criteria? Explain!

The Function of Banks Discuss with a partner: • How do banks make a profit? ? _______________________________________

History of Banking 1. 1 st bankers were __________ where people deposited gold to vaults for a _____ 2. Goldsmiths gave a _____ to a depositor and this became _____ 3. Used a 100% __________ in the beginning, meaning _____ money was completely backed by _____ 4. Then, they realized that they didn’t need to keep all the gold. 5. The Goldsmiths began _____ out some portion of the money they had (__________ Loans). This is called a __________.

Create a Flow Map explaining the history of banking **You may include sub-steps below**

The 3 Functions of Money • ___________ : it can be used to _____ goods and services • ___________ : it can be used to _____ the value of different goods and services • ___________ : It can be _____ to buy something in the future

Tree Map • Create a Tree Map describing the three functions of money! • (Include term, definition, & visual) Three Functions of $$

Why Our Money Has Value: • ___________ -- Throughout the world, $$$ are accepted as form of money • ___________ -- $$$ accepted for money because government says so • ___________ -- “Money doesn’t grow on trees”

Bank Terminology • ___________ — total deposits banks have • ___________ — deposits bank cannot use to make a profit • ___________ — deposits banks can use to make a profit • Vault Cash—cash reserves on hand 2%

THE FEDERAL RESERVE – “______”: (The U. S. central banking system) • Created in _____ after a series of bank failures. The Fed Board of Governors: • __ members appointed by the President, with confirmation by the Senate • Board members serve ____ year terms • _______ appoints the chairperson (_______) to a ___ year term. ____? __Regional Federal Reserve Banks: • Regional banks are located in major cities around the country • Each bank has a president chosen by the bank’s board of directors • The board of directors is typically drawn from the local business and banking community

The Federal Reserve =_________________ One of the functions of the Fed is to ______ the money supply through ____________. Monetary policy works by encouraging or discouraging banks from making _____.

What are the two extremes of the business cycle? ? ? _____________ • TOO ______ SPENDING • TOO _____ SPENDING • The Fed needs to _____ the __________

Recession: Too ____ spending!!! • Try to correct this problem with your partner! • Example: – Let’s say you have only $1 in your wallet right now. Name something you would be able to buy for a $1. – Now, let’s say that your Money Supply (MS) went up…and now you have $5. What would you be able to buy now? ? ? – When your supply of money increased, what happened to your total spending. Did it go up or down? ? ?

Inflation: Too _______ spending!!! • If there is too much spending in the U. S. economy during a period of high inflation, what needs to happen to the Money Supply to help pull the U. S. out of a • With a partner, discuss recession? ? ? your answer for the • How does decreasing the following questions. MS help us get out of a period of high inflation? ? ? • Now, think of this new economic problem when spending is too high.

Monetary Policy • Changes in the __________ , intended to maintain _____ prices, _____ employment and economic _____ (3 _____ Econ Goals!) • If the Fed is fighting unemployment and declining GDP (recession), it wants to _____ the money supply. • If the Fed is fighting inflation, it wants to _____ the money supply.

Read ‘The Tools of The Fed’ After you are done reading, complete the chart below… Problem: Recession The MS needs to ____ Problem: Inflation The MS needs to ____ Reserve Requirement RR: ______ Explain how this specific action will get the economy out of a recession. RR: ______ Explain how this specific action will get the economy out of an inflationary problem. Discount Rate DR: _____ Explain how this specific action will get the economy out of a recession. DR: _____ Explain how this specific action will get the economy out of an inflationary problem. Open-Market Operations OMO: _____ Explain how this specific action will get the economy out of a recession. OMO: ______ Explain how this specific action will get the economy out of an inflationary problem.

3 Tools of The Fed • RESERVE REQUIREMENT • DISCOUNT RATE • OPEN MARKET OPERATIONS

3 Tools of The Fed • __________ – The absolute lowest % that all banks must keep of their actual reserves • __________ – The interest rate that the Fed charges on commercial banks – (Wells Fargo, Wa-Mu, B of A) • _____- __________ – Gov’t bonds (IOUs) that can be bought and sold in the open market

Reserve Requirements • • • The reserve requirement is the minimum percent of deposits that banks must keep on reserve in their banks When the Fed lowers the reserve requirement, banks have _____ money to lend and the money supply ______ When the Fed raises the reserve requirement, banks have ____ money to lend and the money supply ______

Discount Rate • The discount rate is the interest rate that the Fed charges on loans to banks. • When the Fed lowers the discount rate, banks are encouraged to make ______ loans and the money supply ______. • When the Fed raises the discount rate, banks are discouraged from making loans and the money supply ______.

Open Market Operations • When the Fed buys or sells U. S. govt. bonds (IOUs) to influence the money supply • When the Fed buys bonds, bank deposits _____, banks have _______ money to lend, and the money supply _______ • When the Fed sells bonds, bank deposits _____, banks have ____ money to lend, and the money supply _______.

When Fighting Recession: MS needs to _______ • _____ Monetary Policy Using a Money Market Graph • To ___ the MS, the Fed can: – RR: _____ – DR: _____ – OMO: _____

When Fighting Recession: MS needs to _______ • _____ Monetary Policy Using AD and AS Analysis • RR______ • DR___ MS____ i_____ I & C ___ AE_____ AD____ PL/OE_____ • OMO_____

When Fighting Inflation: MS needs to _______ • _____ Monetary Policy Using a Money Market Graph • To ___ the MS, the Fed can: – RR: _____ – DR: _____ – OMO: _____

When Fighting Inflation: MS needs to _______ • _____ Monetary Policy Using AD and AS Analysis • RR______ • DR____ MS____ i_____ I & C ___ AE_____ AD____ PL/OE_____ • OMO_____

Wrap-Up: True or False n n n **If False, write the correct answer** For a given money demand curve, an increase in money supply results in a decrease in interest rates. Monetary policy is carried out by adjusting taxes and government spending. One necessary characteristic of money is that it must be unlimited in supply. Money is anything that is widely accepted for goods and services. The MS needs to decrease in order to fight inflation.