money, banking, & the fed ap macroeconomics chapter 29 & 30 notes
TRANSCRIPT
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Money, Banking, Money, Banking, & the Fed& the Fed
AP Macroeconomics
Chapter 29 & 30 Notes
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MoneyMoney
• Definition: anything that can be used as a medium of exchange, measure of value, and a store of value
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Why not BARTER?Why not BARTER?• barter = trade
• barter economy –
an economy based
on trade
• Not most efficient
system because it
requires a “mutual coincidence of wants”(each person must have exactly what the other
wants—also called “double coincidence of wants”)
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Three Types of MoneyThree Types of Money• 1) Commodity money – money
that has an alternative use as an economic good
• 2) Representative money – money that is backed by a commodity
• 3) Fiat money – money that has value because of government decree
• What phrase is printed on the top left corner of U.S. currency?
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Three Types of MoneyThree Types of Money
“This note is legal tender for all debts, public and private”
• legal tender – fiat money that must be accepted as payment for purchases/debts
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Characteristics of MoneyCharacteristics of Money• Portable
• Durable
• Divisible
• Stable
• Scarce (limited in supply)
• Accepted
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Three Functions of MoneyThree Functions of Money• Medium of exchange – something
accepted by all parties as payment for goods and services
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Three Functions of MoneyThree Functions of Money• Measure of value – common measuring
stick to express the worth or value of a good
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Three Functions of MoneyThree Functions of Money• Store of value – quality that allows
purchasing power to be saved until needed
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MoneyMoney• U.S. currency is printed by the U.S. Dept.
of the Treasury’s Bureau of Printing and Engraving.
• U.S. coins are created by the U.S. Mint.• This money is distributed to banks by the
Federal Reserve Bank (also known as “the Fed”).
• Our currency is known as “Federal Reserve Notes.”
• There are currently about $829 billion in circulation. (most outside the U.S.)
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Money TermsMoney Terms• Demand deposit accounts (DDAs) –
funds deposited in a bank that can be accessed by writing a check and without having to secure prior approval from the bank (Ex.: checking accts)
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Categories of MoneyCategories of Money• M1 – coins, currency, checks,
checking accounts / DDAs [relates to money’s function as a medium of exchange]
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Types of MoneyTypes of Money• M2 – M1 + savings accounts, money
market accounts, CDs (time deposits)[relates to money’s
function as a store of
value]
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Types of MoneyTypes of Money• M3 – M2 + Institutional money market
& long-term savings accounts (large time deposits) [relates to money’s
function as a store of value & unit of accounting]
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Equation of Exchange
(M)(V)=(P)(Q)• M=money supply (M1)• V=velocity (# of times the avg. $ changes
hands in a year)
• P=price levels (current)
• Q (or Y)=real GDP/output
[PQ=nominal GDP]
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Equation of Exchange
(M)(V)=(P)(Q)• What will happen if the money supply
increases, but velocity remains constant?
• What will happen if velocity increases, but M remains constant?
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The Federal Reserve Bank
ECONOMICS
Chapter 14
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The Federal Reserve (the Fed)The Federal Reserve (the Fed)
• The privately-owned (owned by the people—stockholders of private
banks), publicly-controlled (the President selects the Fed Chairman and appoints the Board of
Governors) central bank of the United States
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The Federal Reserve (the Fed)The Federal Reserve (the Fed)• Has the power to lend to banks to prevent
bank runs
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FDICFDIC• In 1933, the U.S. government created the
Federal Deposit Insurance Corporation (FDIC), which insures bank deposits up to $250,000 per customer per bank.
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Fractional Reserve SystemFractional Reserve System• Why couldn’t George give his customers
their money? Where was it?
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Fractional Reserve SystemFractional Reserve System• Banks make money when they make loans
to their customers and charge them interest.
• Banks are only required to keep a portion of all deposits.
• The Fed decides what percentage of all deposits banks must hold (reserve requirement / reserve rate). [Current=10%]
• Banks can take the remaining money and lend it to customers.
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Structure of the FedStructure of the Fed• Directed by a 7-member Board of Governors
– Each app’ted by President to 14-yr. term
• Country is divided into 12 districts, each served by a district bank– New York -Chicago– Boston -Cleveland– Richmond -Atlanta– Dallas -St. Louis– Kansas City -Philadelphia– Minneapolis -San Francisco
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Structure of the FedStructure of the Fed• Federal Open Market Committee (FOMC)
– 12 members – 7 governors, pres of NY Fed, and 4 other Fed district presidents
– Evaluates state of economy and determines interest rates
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Fed ChairmanFed Chairman
• The head of the Federal Reserve is known as the Chairman. The current Chairman of the Fed is Ben Bernanke.
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Fed ResponsibilitiesFed Responsibilities• Main responsibility: controlling the rate of
growth of the money supply
• Acting as the government’s bank• Maintaining the payments system [Ex.: you
swipe debit card @ Zaxby’s, Fed makes sure your $ gets from your bank to Zaxby’s bank]
• Regulating & supervising banks• Preparing consumer legislation [Ex.: making sure
that businesses treat consumers fairly and disclose all information in credit transactions]
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MONETARY POLICYMONETARY POLICY
AP Macroeconomics
Chapter 29 & 30 Notes
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MacroeconomicsMacroeconomics• macroeconomics—analysis of the
overall national economy
• We can measure the health of the national economy by assessing THREE factors:– GDP – Unemployment– Inflation
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A HEALTHY EconomyA HEALTHY Economy• The economy is considered healthy if:
–There is a sustained increase in real GDP (economic growth)
–Unemployment is low–Prices are stable (or there is
minimal inflation)[On business cycle =
Expansion/Recovery]
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An UNHEALTHY EconomyAn UNHEALTHY Economy• The economy is considered unhealthy if:
–There is a sustained decrease in real GDP
–Unemployment is high
–Excessive inflation (or deflation) exists
[On business cycle = Contraction/Recession]
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Ensuring Economic StabilityEnsuring Economic Stability• *In order to make sure our economy is stable
(economic stability – reduction of extreme ups & downs in the business cycle & standard of living), the federal government steps in with…
• Macroeconomic stabilization policies – attempts by the federal government to keep the economy healthy and to make the future more predictable
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Economic Stabilization PoliciesEconomic Stabilization Policies• **The two types of stabilization
policies are fiscal & monetary policy. Monetary policy attempts to either INCREASE or DECREASE
the money supply.
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• **Policy can be expansionary or contractionary.
• Expansionary increases the money supply, which spurs economic growth, because it increases demand. (loose $)
• Contractionary decreases the money supply, which can curb inflation and slow down spending and can slow down economic growth. (tight $)
Economic Stabilization PoliciesEconomic Stabilization Policies
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• monetary policy – changing the rate of growth of the supply of money in circulation (specifically, to curb inflation or deflation)
• *Implemented
by the FED
Economic Stabilization PoliciesEconomic Stabilization Policies
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Three Tools of Monetary PolicyThree Tools of Monetary Policy• open market operations – when
the Fed buys and sells securities (government bonds) on the open market
• contractionary:– selling securities / bonds
• expansionary:– buying securities / bonds
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• reserve rate – the amount of deposits the bank must keep “on reserve”
(i.e., stored in their vault or deposited in their local Federal Reserve branch bank)
• contractionary: raising the reserve rate
• expansionary: lowering the reserve rate
Three Tools of Monetary PolicyThree Tools of Monetary Policy
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• discount rate – the interest rate on loans made by the Federal Reserve to banks
• contractionary: raising the discount rate
• expansionary: lowering the discount rate
Three Tools of Monetary PolicyThree Tools of Monetary Policy
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Effects of Monetary Policy• Federal funds rate – interest rate
banks charge each other **The Fed “targets” this interest rate to**
change the amount of $ in the money supply!
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Effects of Monetary Policy• prime rate – interest rate banks
charge their best customers(affected by the discount & fed funds rate)