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Agenda- 5/15 1. 2. 3. 4. 5. Ch. 15 Lecture (RS) Ch. 15 Book Work (LS) Stock Market Log Catch up! HW: Stock Market, Community Service Ch. 14, Sec. 1 & 2 Money Moola, moola Mmm… Copyright © 2000 by David Beck Money is only a tool used to make economic exchanges easier. • It always must represent something for it to have value. • Chiefly, it is a reflection of wealth held by its owner. Historically, money has been almost anything. Examples: • Stones. • Seashells. • Animal skins. • Cigarettes. What is the new trendy money? Mostly precious metals has been the consideration behind money’s value. How did bank notes develop? Coins were once used having full content of metal. • Private banks then issued their own notes, widely accepted on bank’s reputation. • (read, don’t write) Abuses (read, don’t write) • Most banks printed only the amount of currency they could back with gold and silver. • A few, however, got clever and decided to print more money than they could back. These banks were called “wildcats”. Other problems (read, don’t write) • Each bank issued different currency. By the Civil War, the United States had 1,600 banks issuing more than 10,000 kinds of paper currency! • People didn’t trust bank notes because it was hard to tell whether it was a real note backed by a legitimate bank. In 1913… • The federal government established the Federal Reserve System and it set up a standard currency for the entire nation. What backs up your money today? • We used to be on the gold standard, which meant you could exchange any paper money for its value in gold. What backs up your money today? First… • The U.S. government— its strength and stability. “The full faith and credit of…” • Our confidence in that government. • What if that government goes under? What are the three functions of money? 1. Measure of value. 2. Store of value. 3. Medium of exchange. 1. 2. 3. 4. What are the notable characteristics of money? Durable—it must last. Portable—it must be easy to carry around. Divisible—change must be able to be made with it. Recognizable—it can be easily identified. More characteristics… 5. Unreproducable—it can’t be easily reproduced. 6. Transferable—it can be given from one to another. 7. Adequate-but-limited—it should be in good supply but not too abundantly. And one more characteristic… 8. Stable—it cannot change its value too abruptly. This is the trickiest characteristic of them all. What happens when it is unstable? Mid-way point class assignment • Left-side (will be more questions to follow ; ) • P. 388 –#2&3 What kinds of money are there today? M1 • Currency and coins in circulation—1/3 of money. • Demand deposits, used as checking accounts—2/3 of money. More money out there today… M2 = M1 +… • Savings and money market accounts. How are banks and the government involved in all this? • Government monitors $$$ as it goes through the banks. • Banks are required to have a reserve set aside— $$$ they don’t lend out. Basic idea of banking – Fractional Reserve Banking • Banks use a portion/fraction of deposits to lend and charge interest—the “price” of the loan. • Loans are only as good as the borrowers’ ability to pay them back. What if a bank goes under? • FDIC was set up to insure depositors. • It insures your $$$ up to $250,000. Banks can actually create money. • Annie puts $10,000 in the bank, and the bank can then loan out 9,000 of it. ($1000 on reserve) • Henry gets a loan for $9,000, and puts it in his bank, which can loan out 8,100 of it. • Peggy gets a loan for $8,100 and puts it in her bank, which can loan out 7,300 of it. • How much is now out there in the economy? • How much was originally deposited? Look! “Created” money! Perfectly legal, too! Original deposit $10,000 Wow! Is that for real?! Total of $$$ out there now $9,000 8,100 7,300 $24,400! Fractional Reserve Banking Bank Run / Reserve Banking Ch. 14 book work • P. 388 –#2&3 • P. 397 - # 3, 5, & 6 The Fed Ch. 14, Sec. 3 The central bank of the U.S. • It is the Federal Reserve System. For short: The Fed. • It is an independent government organization that is accountable to its member banks. The Fed • The system is divided into 12 districts. • It is run by the Federal Reserve Board of Governors. It’s leadership: 7 officers, each with 14 year terms. • The Chairman: Janet Yellen • Former Chairman: Ben Bernanke / • Alan Greenspan, a very powerful individual. What is the nature of its power? • It manages the flow of money in and out of the economy. 1. 2. 3. 4. 5. What are its significant responsibilities? Clear checks. Regulate banks. Recommend consumer banking laws. Maintain currency. Use monetary policy to control money supply. What is monetary policy? • The tools used by The Fed to make sure the right amount of money is in the economy. Quick Intro to The Fed Monetary policy • When $ is put into the economy, then interest rates • You hope to get more employment • But you may also get inflation Monetary policy • When $ is taken out of the economy, then interest rates • You hope to get less inflation • But you may also get unemployment How a Decrease in the Money Supply Increases Interest Rates Interest Rate (Price of a loan) 1. An decrease in the Money Supply… S2 S1 2.5 % 2.0 % New equilibrium Initial equilibrium 2. . . . resulting in a higher Interest Rate Demand 0 3. . . . and a lower quantity available to loan Quantity of Money in the Economy Copyright©2003 Southwestern/Thomson Learning What is their goal? • It is to keep the economy stable! How the Fed uses monetary policy (Read, don’t write) Goal More employment (but more inflation ) Objective PUT $$$ IN $$$ The U.S. economy Using monetary policy (Read, don’t write) Goal Objective Less inflation Take $$$ (but more unemployment ) The U.S. economy out $$$ What are the three ways the Fed tries to do this? Open Market Operations $$ IN $$ Out Reserve Ratio Discount (Interest) Rate What are the three ways the Fed tries to do this? Open Market Operations $$ IN $$ Out Buy Government Securities Sell Government Securities Reserve Ratio Discount (Interest) Rate Open Market Operations • The Fed BUYS Govt. securities from US to put $$$ into the Economy • The Fed SELLS Govt. securities to US to remove $$$ from the Economy Buying and selling of government securities (Read, don’t write) $$$ The Fed BUYS Savings Bonds The economy, where the people are! Buying and selling of government securities (Read, don’t write) $$$ The Fed SELLS Savings Bonds The economy, where the people are! What are the three ways the Fed tries to do this? Open Market Reserve Ratio $$ IN $$ Out Discount (Interest) Rate Buy Decrease Government Securities Sell Government Securities Increase Reserve Ratio • Fed has control over the reserves in its banks. • The reserve rate is the percent of deposits that cannot be loaned out. • Reserve ratio has an inverse effect on the Money Supply – RR MS and vice-versa What are the three ways the Fed tries to do this? Open Market Reserve Ratio $$ IN $$ Out Discount (Interest) Rate Buy Decrease Lower Government Securities Sell Government Securities Increase Raise Discount Rate • The Fed determines the Discount Rate: • The rate the Fed charges on loans to its member bank. – When the Fed raises or lowers the discount rate, all other interest rates also increase or decrease in a direct relationship. – Consumer interest rates are usually several points higher than the discount rate. The idea is… • If interest rates are higher, then fewer people will borrow money. • Therefore there will be less money in the economy. By the same rule… • If interest rates are lower, then more people will want to take out loans. • There will then be more money in the economy. What are the three ways the Fed tries to do this? Open Market Reserve Ratio $$ IN $$ Out Discount (Interest) Rate Buy Decrease Lower Government Securities Sell Government Securities Put money in = Easy Increase Raise Easy (Expansionary) Monetary Policy • Buy securities • Reduce reserve ratio • Lower discount rate – Used when economy is sluggish (falling GDP) – Stimulates investment, expands production and employment – Possible side-effect: Can fuel inflation What are the three ways the Fed tries to do this? Open Market Reserve Ratio $$ IN $$ Out Discount (Interest) Rate Buy Decrease Lower Government Securities Sell Government Securities Increase Raise Take money out--Tight Tight (Contractionary) Monetary Policy • Sell securities • Increase reserve ratio • Raise discount rate – Used when economy is overheated (rapidly increasing GDP and inflation) – Decrease investment and slow economic expansion – Possible side-effect: Can cause increase in unemployment One other way the Fed may influence monetary policy is with… • “Moralsuasion” • When the Fed speaks, people listen! (Particularly people who manage $$$, especially if it’s their own!) Homework review p. 410 - #18 - #21 - #23-25 Monetary Policy quick video review Errgh! That’s not very encouraging… It isn’t? Ahhh, but did you know that there are a number of things you can do about all this?! There are! But first, let’s see what the Government can do to stabilize the economy. Ch. 15 Fiscal Policy Or What can the Government do??? Aggregate Supply • The total value of all G & S that all firms will produce in a specific time period at various price levels Aggregate Demand • The total value of all G & S demanded at different price levels What can the Government do to stabilize the economy ? • The Government sets Fiscal Policy – Government’s decisions about government spending (G) & taxing to stabilize the economy to: • Increasing output (GDP) • Decrease unemployment • Reducing inflation What can the government do to stabilize the economy? – The President can propose fiscal policy BUT – Congress must approve all government spending and all tax rates Fiscal Policy Supply-side policies • production • Cut taxes and government regulations to incentives for business & individuals • Businesses invest and expand, creating jobs; people work harder, save and spend more • investment and productivity lead to output • With output , the economy grows and unemployment goes down Supply-side Fiscal Policy “Trickle-down” theory – If you lower corporate taxes and/or give corporation government subsidies this will • create more jobs for ordinary citizens • who then benefit indirectly from a fiscal policy that benefits corporations Demand-side Policy • Stimulates demand for goods & services to spur output – Cut taxes / give a “refund" or increase federal spending •( “G” in GDP) to put money into people’s hands – With more money, people buy more – Businesses output to meet growing demand – With output , the economy grows and unemployment goes down Easy (Expansionary)Fiscal Policy - Used when economy is faced w/recession, high levels of unemployment and slow growth in GDP (Stimulates the economy) • Increased government spending (increase “G”) • Lower taxes • A combination of the two Tight (Contractionary) Fiscal Policy Used when growth is overheated (demand for workers (by firms) or goods (by consumers) • Decreased government spending (decrease “G”) • Increased taxes • A combination of the two Homework/Warm-up • • • • • P 417 - # 1 P 420 - ? On Govt. Spending P 424 - ? On Tax Rates P 426 – “Timber” ? P 427 - # 2 – 4