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AGENDA Fri 4/13 & Mon 4/16 • • • • • • • Review HW (pg 403 #1 a-f; 2-5) QOD #28:Money, money, money! Purpose of Money Federal Reserve Monetary Policy *Back of Business Cycles Wksht HW: pg 284 #1-9 RQ ; pg 292 #1-6; pg 306 #1-5; pg 406 #1-5 – Extra Credit #2 – Study for Macro Exam: Thurs 4/19 & Fri 4/20 – Stock Printout #4 Mon 4/23 & Tues 4/24 QOD #28: Money, money, money! • Describe what you think life would be like in a world where money did not exist. – Imagine you woke up tomorrow and there was no money at all, neither paper currency nor coins. – How would your life be different? – How would goods/services be exchanged? – How would the value of goods/services be determined? • Double coincidence of wants is when each party wants what the other has. This is required in a barter economy. • Transaction costs: time and effort spent to make an exchange. • Money: any good that is widely accepted in exchange for goods or replacement of debts. • Money lowers the transaction costs of exchanges. • Lowering transaction costs means freeing up time. Provides more goods, services, and leisure time. • Specialization: produce one item and earn money to buy others. • Gresham’s Law: Bad money drives good money out of circulation. • Medium of Exchange: anything that is acceptable in exchange for goods and services. • Unit of Account: common measurement in which value is expressed. • Store of Value: maintains value over time. Components of the Money Supply • The money supply is the total supply of money in circulation Money Supply = Currency + Checking Accounts + Travelers checks • Currency – coins and paper money • Checking Accounts – or demand deposit, funds can be converted to currency on demand • Traveler check – check issued by a bank which is signed at time of issue and when it is cashed Is a savings account ‘money?’ • Not if you can’t write checks on it – (i.e. it is not an accepted method of exchange) • It is considered near money assets that can be easily and quickly turned into money Chapter 11-1: Federal Reserve System The Fed • When you hear the term, “the Feds,” what images or ideas come to mind? • Fact: – The “Feds” in economics actually relates to the Federal Reserve System. • Based on that information, what do you think the “Fed” does in our economy? • Fact: – The Federal Reserve System is the central bank and regulates the banking system in our country. • Based on that information, how do you think the “Fed” accomplishes these duties in our country? The Federal Reserve System • The Federal Reserve System (also called the Fed) is the central bank of the United States. • set up by the Federal Reserve Act in 1913. • located in Washington, D. C. • 2 main parts of the Federal Reserve System • 1. Board of Governors • 2. 12 Federal Reserve district banks. Board of Governors • The Board of Governors of the Federal Reserve System controls and coordinates the Fed’s activities. • The Board is made up of 7 members, each appointed for a 14 year term. Chairman of the Board • The current Chairman of the Board is Ben S. Bernanke until 2014 (2nd term). – Chairman of the Board is named by the President from among the members and confirmed by the Senate. – They serve a term of four years. 12 Federal Reserve District Banks • The district banks are located all around the United States and each has a president. • The Federal Open Market Committee (FOMC) is the major policy making group within the Fed. • Seven of the twelve members of FOMC are members of the Board of Governors. The other five members come from the presidents of Federal Reserve district banks. Functions of the Federal Reserve System • Control the money supply / monetary policy- help promote economic goals • Supply the economy with paper money- money is printed by the Fed and supplied to the 12 district banks. (mints coin $$) • Hold bank reserves- each commercial bank is required to have a reserve of money with the Fed • Provide check-clearing services- check movement from bank to bank • Supervise member banks- to ensure that banks lending policies are ethical and up to all regulations. • Serve as the lender of last resort- will lend $$ to banks who cannot get $$ from any other place. Control the money supply • The Federal Reserve controls the three tools of monetary policy: 1. open market operations • Conducted by FOMC • Sell or Buy govt securities (can be traded) – Treasury bills (mature in less than 1 year) – Treasury notes (mature in 2-10 years) – Treasury bonds (mature in 20-30 years) 2. the discount rate 3. reserve requirements Bank Reserve Information • Total reserves - the sum of a bank’s deposits in in the reserve account at the Fed & Vault cash. • Required reserves - the minimum amount of reserves a bank must hold against its deposits as mandated by the Fed. – Banks can make loans with their excess reserves. • Ex: A bank has excess reserves of $4 million, it can make loans of $4 million. This is why the Fed is so Important! • The Fed controls the federal discount rate which when changed triggers a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services. Monetary Policy • expansionary monetary policy – Fed increases money supply to increase total money supply – objective is to reduce unemployment rate • contractionary monetary policy – Fed decreases MS to decrease total MS – objective is to reduce inflation Expansionary Monetary Policy • To lower unemployment rate – Fed increase MS – greater MS = greater total supply – firms begin to sell more products – firms hire more workers • No crowding out with monetary policy • An increase in MS will increase total spending indirectly lowering unemployment Contractionary Policy • contractionary monetary policy – works to reduce inflation – Fed decreases money supply – this will lower total spending – firms begin to sell less – firms reduce prices to get rid of excess inventory Monetary Policy and Exchange • the objective of monetary policy is to maintain a stable P (price level) – neither inflation - P rising – nor deflation – P falling • Read pages 405-406 • automatic stabilizers? references • http://www.federalreserve.gov/aboutthefed/d efault.htm • Arnold, R (2001). Economics in our times, 2nd edition. Chicago, IL: National Textbook Company .