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UNIT 8
SWBAT: Define Monetary Policy, identify the tools of the
Federal Reserve [The Fed] and how they are used to fight
either a recession or inflation.
Money, Banking, and
Monetary Policy
STANDARD 12.3
Students analyze the influence of the federal government on the
American economy.
STANDARD 12.3.4
Understand the aims and tools of monetary policy and their
influence on economic activity (e.g., the Federal Reserve).
Warm Up
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 Ideal Money is…
•
•
•
•
•
•
•
Durable
Portable
Divisible
Uniform quality
Has a low opportunity cost
Does not fluctuate widely in value
In limited supply
$$ Money $$
Discuss with a partner:
• Does our money fulfill those 7
criteria??
The Function of Banks
Discuss with a partner:
• How do banks make a profit????
History of Banking
1. 1st bankers were Goldsmiths where people
deposited gold to vaults for a fee
2. Goldsmiths gave a receipt to a depositor and
this became $$$ (money)
3. Used a 100% Reserve System in the beginning,
meaning paper money was completely backed
by gold
4. Then, they realized that they didn’t need to
keep all the gold.
5. The Goldsmiths began loaning out some
portion of the money they had (Interest Earning
Loans). This is called a Fractional Reserve
System.
FDIC-Federal Deposit
Insurance Corporation
• Member banks give ½ of 1% of its
deposits for insuring accounts up to
$100k…since our current recession
it’s gone up to $250k
• The purpose is to give confidence in
our banking system, avoid a panic,
and bank runs
Create a Flow Map explaining the
history of banking
**You may include sub-steps
below**
What is Money???
• Money is anything that is generally
accepted as final payment for goods
and services
The 3 Functions
of Money
• Medium of Exchange: it can be
used to purchase goods and
services
• Unit of Account: it can be used to
compare the value of different
goods and services
• Store of Value: It can be held to
buy something in the future
Tree Map
• Create a Tree Map describing the
three functions of money!
• (Include term, definition, & visual)
Three Functions of
$$
Why Our Money Has Value:
• Acceptability
--Throughout the world, $$$ are
accepted as form of money
• Legal Tender
--$$$ accepted for money because
government says so
• Relative Scarcity
--”Money doesn’t grow on trees”
3 categories of the Money Supply
acc'd to the Fed.
• M1-- coins, currency, and checks
– very liquid (easily accessible)
– $$ we use and spend every day
• M2 – savings + anything in M1
– short term savings
– harder to access than M1 and stored for
purchases for durable goods (i.e. cars,
appliances, furniture)
• M3 -- long term savings + M2
– Stocks, bonds, retirement - 401(k), Pension
**M3 = Total Money Supply**
Bank Terminology
• Actual Reserves—total deposits
banks have
• Legal Reserves—deposits bank
cannot use to make a profit
• Excess Reserves—deposits banks
can use to make a profit
• Vault Cash—cash reserves on hand2%
THE FEDERAL RESERVE – “The Fed”:
(The U.S. central banking system)
• Created in 1914 after a series of bank failures.
The Fed Board of Governors:
• 7 members appointed by the President, with
confirmation by the Senate
• Board members serve 14 year terms
• President appoints the chairperson (Ben Bernanke)
to a 4 year term.
12 Regional Federal Reserve Banks:
• Regional banks are located in major cities around
the country (i.e. Fed Res. Bank of NY)
• 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
• There are a number of committees within each
bank (i.e. Federal Open Market Committee)
The Federal Reserve
Districts
The Fed Chairman
• Ben Bernanke
The Federal Reserve
=The U.S. Central banking system
One of the functions of the Fed is to
control the money supply through
monetary policy. Monetary policy
works by encouraging or
discouraging banks from making
loans.
What are the two extremes of
the business cycle???
Recession
Inflation
• TOO ______
SPENDING
• TOO _____
SPENDING
Recession:
Too little 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???
Why Increasing the MS is Good
to Fight a Recession
• If you increase the money supply, there is more
money circulating in the U.S. economy, which
means more money for people to spend.
• When people spend more money, you are slowly
helping the economy come out of a recession.
Inflation:
Too MUCH spending!!!
• Now, think of this new
economic problem
when spending is too
high.
• With a partner, discuss
your answer for the
following questions.
• 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 period of high
inflation???
• How does decreasing the
MS help us get out of a
period of high inflation???
Possible Answers
• If you decrease the money supply, there is less
money circulating in the U.S. economy, which
means less money for people to spend.
• This will result in an overall decrease in
spending…which will allow prices to slowly go
back down a bit
What are the two extremes
of the business cycle???
Recession
Inflation
• TOO little
SPENDING
• TOO much
SPENDING
• The Fed needs to
increase the money
supply
• The Fed needs to
decrease the
money supply
Monetary Policy
• Changes in the money supply,
intended to maintain stable prices, full
employment and economic growth (3
Macro Econ Goals!)
• If the Fed is fighting unemployment
and declining GDP (recession), it
wants to increase the money supply.
• If the Fed is fighting inflation, it wants
to decrease 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
• Reserve Requirement
– The absolute lowest % that all banks must
keep of their actual reserves
• Discount Rate
– The interest rate that the Fed charges on
commercial banks
– (Wells Fargo, Wa-Mu, B of A)
• Open-Market Operations
– 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
1.
2.
3.
4.
5.
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.
Activity!!
• Create your own money!
$
$
$
$
$
Your $$ Wrap-UP
• Does your money have value?
Explain.
• What gives it it’s value?
• Who does it have value to?
• Could you use it to buy a bag of hot
cheetos at 7-11? Why/why not?
$$$$$$
$$$$$