3. Did You Know That …
Money
◦ Any medium that is universally
accepted in an economy both by
sellers of goods and services as
payment for those goods and
services and by creditors as
payment for debts
5. The Functions of Money
The functions of
money
◦ Medium of
exchange
◦ Unit of accounting
◦ Store of value
(purchasing
power)
◦ Standard of
deferred payment
6. The Functions of Money
(cont'd)
Medium of Exchange
◦ Any item that sellers will accept as
payment
◦ Money facilitates exchange by
reducing transaction costs associated
with means-of-payment uncertainty
Permits specialization, facilitates efficiencies
Avoids need for Barter!
Keeps Fenick from teaching to trade for
Donuts!
7. The Functions of Money
(cont'd)
Barter
◦ The direct exchange of goods and
services for other goods and
services without the use of money
◦ Simply a direct exchange requires a
double coincidence of wants
◦ I want a sandwich, I need to find
someone that wants to learn
Economics!
8. The Functions of Money
(cont'd)
Unit of Accounting
◦ A measure by which prices are
expressed
◦ The common denominator of the
price system
◦ A central property of money
9. The Functions of Money
(cont'd)
Store of Value
◦ The ability to hold value over time
◦ A necessary property of money
◦ Money allows you to transfer value
(wealth) into the future
10. The Functions of Money
(cont'd)
Standard of Deferred Payment
◦ A property of an item that makes it
desirable for use as a means of
settling debts maturing in the
future
◦ An essential property of money
11. Properties of Money
Liquidity
◦ The degree to which an asset can
be acquired or disposed of without
much danger of any intervening
loss in nominal value and with small
transaction costs
◦ Money is the most liquid asset
13. Properties of Money (cont’d)
Question
◦ What is the cost of holding money
(its opportunity cost)?
Answer
◦ It is the alternative interest yield
obtainable by holding some other
asset
14. Properties of Money (cont’d)
Questions
◦ What backs money?
◦ Is it gold, silver, or the federal
government?
Answer
◦ Your confidence
15. Properties of Money (cont’d)
Transactions Deposits
◦ Checkable and debitable account
balances in commercial banks and
other types of financial institutions,
such as credit unions and mutual
savings banks
◦ Any accounts in financial institutions
on which you can easily transmit
debit-card and check payments
without many restrictions
16. Properties of Money (cont’d)
Fiduciary Monetary System
◦ A system in which currency is
issued by the government and its
value rests on the public’s
confidence that it can be exchanged
for goods and services
◦ The Latin fiducia means “trust” or
“confidence”
17. Properties of Money (cont’d)
Currency and transactions
deposits are money because of
their
◦ Acceptability
◦ Predictability of value
18. Defining Money
Money is important
◦ Changes in the rate at which the
money supply increases or decreases
affect important economic variables
(at least in the short run) such as
inflation, interest rates, employment,
and the level of real GDP
Money Supply
◦ The amount of money in circulation
19. Financial Intermediation and
Banks
Most nations have a banking
system that encompasses two
types of institutions
1. One type consists of private
banking institutions
2. The other type of institution is a
central bank
21. Learning Goal
Describe the basic structure and
functions of the Federal Reserve
System
22. The Federal Reserve (AKA – The Fed)
The central bank of the United States of
America.
◦ Created by Congress in 1913
23. Mission Statement & The Dual
Mandate
The Federal Reserve System is the
central bank of the United States. It was
founded by Congress in 1913 to provide
the nation with a safer, more flexible, and
more stable monetary and financial
system. Written into the Federal Reserve
Act, is the mission “To create a healthy
growing economy with high employment and
price stability.”
24. The Fed
The “Fed” is a
system/network of
banks.
Responsible for
Monetary
Policy.
25. Cont.
Monetary Policy – Changing the
growth of money supply in circulation.
26. Federal Open Market Committee
Board of Governors, head of NY Fed Bank,
and 4 rotating heads of the other 11 district
banks.
◦ Meet 8 times a year to set MONETARY
POLICY
◦ Extremely important decision making body.
27. Banking System
12 District Banks – 25 branch banks
underneath it.
◦ All national banks must become members of the
Federal Reserve System.
28.
29. Loose Money Policy “Expansionary”
Credit is abundant and inexpensive to
obtain.
◦ Encourages economic growth
30. Tight Money Policy “Contractionary”
Credit is in short supply and expensive to
obtain.
◦ Used to control inflation
◦ Think money when money is “tight” it is harder to
get, not as much available.
31.
32. Fractional Reserve Banking
Only a
fraction of
bank
deposits
must be
kept on
hand or in
reserves
the rest
can be lent
out.
33. Reserve Requirements
A requirement by the Fed – % of Money
that banks must keep on reserve from
deposits.
◦ Example – Jack deposits $1000 into a checking
account. The reserve requirement is 10%. The
bank must therefore hold $100 and may loan out
the remaining $900.
36. Learning Goal
Describe what tools the Federal Reserve
uses to run a smooth economy.
37. The Federal Reserve
The main goal of the Federal Reserve is to
keep the money supply growing steadily and
the economy running smoothly
38. Tool #1 – Changing Reserve
Requirements
Reserve Requirements – The % of money
that banks must hold from a deposit.
◦ Increase Requirements – Less money available
to lend out
◦ Decrease Requirements – More money
available to lend out
39.
40. #2 – Discount Rate
Banks can borrow money from the Fed
(to meet reserve requirements).
◦ The interest charged by The Fed on these
loans is the Discount Rate
41. Cont.
Prime Rate – Interest rate banks charge
its best business customers. Banks pass
on discount rate changes to customers.
42. Cont.
Decrease Interest Rate = Loans become
cheaper to obtain = Loans INCREASE in
Quantity Demanded
Increase interest rates – Loans become
more expensive – discourages borrowing
43. #3 – Open Market Operations
Buying and selling government securities
(Most common tool Fed uses to control
money supply
◦ Fed buys securities it is increasing money
supply
◦ Fed sells securities it is decreasing money
supply
44. Federal Funds Rate
Interest rate that banks charge each
other for short-term loans.
Banks that cannot meet reserve
requirements must borrow or pay a
penalty.
45. Cont.
Fed tries to indirectly change this rate
through open market operations.
46. Delays in Effects of Monetary
Supply
Full effects can take months, sometimes
up to a year
47. Criticisms of Fed Policies
Fed has increased money supply during times
of inflation (creating worse inflation)
Fed has decreased money supply during
recessions (thereby making the recession
worse)
48. Cont.
Some Recommend – Money supply increased
at same rate each year (no monetary policy)
Gov’t (spending and taxation) also has a
dramatic affect on the economy.
