Download Unit 6 Day 4 TC

Economics, Fiscal & Monetary Policy
Objective:
Question:
Answer:
Unit 6; Day 4
1. Identify the three main functions of money and three types of money.
2. Define monetary policy and its role in the U.S. economy.
3. Describe the role of the Federal Reserve in controlling the supply of money.
What is the Federal Reserve and how did it get started?
Instructional Notes / Terms / Activity:
1. Money Characteristics
a. Durability – not easily destroyed
b. Portable - easy to carry or transport
c. Divisible - can be divided up or down into larger or smaller units
d. Uniformity – identical in size, shape, and design
e. Difficult to Reproduce - cannot be replicated easily, copied
f. Stable in Value – does not change in power or value
g. Acceptability - generally accepted in the economy
2. Money Functions
a. Unit of Accounting – measuring stick, used to compare things.
b. Medium of Exchange – facilitates trade and exchange.
c. Store of Value - can be saved up for future use, stored up.
3. Types of Money
a. Commodity Money - money that has value independent of its use.
b. Representative Money - money backed by gold or silver.
c. Fiat Money - money that has value by government order or decree.
4. Monetary Policy
a. Definition - controlling the supply of money in the economy to
smooth out changes (fluctuations) in the economy.
b. The Federal Reserve System
* The Fed is responsible for monetary policy decisions
* The Fed was created in 1913 by an act of Congress
* The Fed has twelve (12) Federal Reserve District Banks.
* Our Federal Reserve District Bank is located in San Francisco
* Main Responsibilities:
- regulating banks and the banking industry; checks
- controlling the supply of money in the economy.
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5. Changing the Supply of Money
h. Federal Open Market Operations buying or selling Treasury
Securities to change the supply of money.
 Example:
"Fed" Sells Treasury Securities => Money Supply
"Fed" Buys Treasury Securities => Money Supply
Decreases
Increases
i. Changing the Discount Rate of Interest - the interest rate that
banks pay to borrow money from the federal government.
 Example:
"Fed" Raises Discount Rate => Money Supply
"Fed" Lowers Discount Rate => Money Supply
Decreases
Increases
j. Changing the Reserve Requirement - the amount of money a bank
must keep on reserve and not loan out to customers.
 Example:
"Fed" Increases Reserve Req. => Money Supply
"Fed" Decreases Reserve Req. => Money Supply
Decreases
Increases
6. Video Quiz: "What Should The Fed Do?
a. Scenario #1 - Stable prices; The Fed should do nothing.
Why? Prices are stable, no money supply changes needed.
b. Scenario #2 - High Inflation; Decrease money supply.
Why? Prices are rising too fast, less money = lower prices.
c. Scenario #3 - Slow economic growth; Increase money supply.
Why?No one spending money; more money = more spending.
d. Scenario #4 - High Inflation and High Unemployment
Why? Fix inflation first; Decrease the money supply.
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