Transcript Economics for Today 2005

Money and the
Federal Reserve
System
• Key Concepts
• Summary
©2005 South-Western College Publishing
1
What is discussed
in this chapter?
We discuss the three
functions money,
definitions of money,
and organization and
services of the Federal
Reserve System
2
What is barter?
The direct exchange of one
good for another good,
rather than for money
3
What is the problem
with barter?
It requires a
coincidence of wants
4
What is money?
Anything that serves as
a medium of exchange,
unit of account, and
store of value
5
What is the
advantage of money?
The use of money
simplifies and therefore
increases market
transactions
6
What are the
functions of money?
• Medium of exchange
• Unit of account
• Store of value
7
What is a
medium of exchange?
The primary function of
money to be widely
accepted in exchange
for goods and services
8
What is a
unit of account?
The function of money to
provide a common
measurement of the
relative value of goods
and services
9
What does it mean that
money is liquid?
It is available to spend in
exchange for goods
and services without
any additional expense
10
Are credit
cards money?
No, credit cards fail to
meet the store-ofvalue criterion and are
therefore not money
11
What is the best level
of scarcity for money ?
The supply of money
must be great enough
to meet ordinary
transactions needs, but
not be so plentiful that
it becomes worthless
12
What are other
properties of money?
Money must be …
• portable
• divisible
• uniform
• acceptable
13
What is
commodity money?
Anything that serves as
money while having
market value in other uses
14
Is our money backed
up by gold or silver?
No, our paper money was
exchangeable for gold until
1934, and in 1963 Congress
removed the right to
exchange $1 bills for silver
15
What is fiat money?
Money accepted by
law and not because
of redeemability or
intrinsic value
16
What makes our dollar
bills fiat money?
All our bills claim that “This
note is legal tender for all
debts public and private”
17
What does
legal tender mean?
Legally dollar bills
cannot be refused as
payment for a debt
18
What is currency?
Money, including coins
and paper money
19
What are
checkable deposits?
The total of checking
account balances in
financial institutions
convertible to currency “on
demand” by writing a check
without advance notice
20
What is M1?
The narrowest definition
of the money supply. It
includes currency,
traveler’s checks, and
checkable deposits
21
What is M2?
The definition of the
money supply that equals
M1 plus near monies,
such as savings deposits
and small time deposits
of less than $100,000
22
What is M3?
The definition of the money
supply that equals M2 plus
large time deposits of
$100,000 or more
23
What distinguishes M1
from M2 and M3?
M1 is more liquid
than M2 or M3
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The Money Supply 2003
Currency
48%
52%
Traveler's checks checkable deposits
25
Small
time
deposits,
15%
The Money Supply 2003
M1
21%
M1
Savings deposits
Small time
deposits
Savings
deposits
26
Large
time
deposits
32%
The Money Supply 2003
M2
Large time
deposits
M2
68%
27
What is the federal
reserve system?
The 12 central banks that
service banks and other
financial institutions
within each of the
Federal Reserve districts
28
What is the Board of
Governors of the Fed?
The seven members
appointed by the
President and confirmed
by the U.S. Senate
29
How long does a
board member serve?
They serve for a
non-renewable
fourteen-year term
30
What is the
responsibility of
the board?
To supervise and control the
money supply and the
banking system of the U.S.
31
What is the chairman
of the Board of
Governors?
The President designates
one member of the Board
to serve as chair for a
renewable four-year term
32
Who is
Alan Greenspan?
Chairman of the Board
of Governors of the Fed
33
What is the Federal
Open Market
Committee?
The FOMC is the Fed’s
committee that directs the
buying and selling of U.S.
government securities
34
What is the purpose
of the FOMC?
To increase the
money supply if we
have unemployment
and decrease it if we
have inflation
35
What is the Federal
Advisory Council?
12 prominent commercial
bankers who council
board members but who
do not have voting rights
36
What percent of all
deposits reside in
member banks?
About 70%
37
The Fed’s
Board of Governors Organization
Regional Fed Banks
U.S. Banking System
38
What does a Federal
Reserve Bank do?
• Controls the money supply
• Clears checks
• Supervises and regulates
banks
• Maintains and circulates
currency
• Protects consumers
• Maintains federal government
checking accounts and gold
39
What is the Federal
Deposit Insurance
Corporation?
The FDIC is a government
agency established in
1933 to insure commercial
bank deposits up to a
specified limit
40
What is the
Monetary Control Act?
A 1980 law that gave
the Fed greater
control of nonmember
banks and makes all
financial institutions
more competitive
41
Key Concepts
42
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•
•
•
•
•
•
What is barter?
What is money?
What are the functions of money?
What does it mean that money is liquid?
What are other properties of money?
What is commodity money?
Is our money backed up by gold or silver?
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•
•
•
•
•
•
•
What is fiat money?
What is currency?
What is M1?
What is M2?
What is M3?
What is the Federal Reserve System?
What is the Board of Governors?
44
• What is the Chairman of the Board of
Governors?
• What is the Federal Open Market
Committee?
• What is the Federal Advisory Council?
• What does a Federal Reserve Bank do?
• What is the Federal Deposit Insurance
Corporation (FDIC)?
45
Summary
46
Money can be anything that
meets these three tests. Money
must serve as (1) a medium of
exchange, (2) a unit of account,
and (3) a store of value. Money
facilitates more efficient
exchange than barter. Other
desirable properties of money
include scarcity, portability,
divisibility, and uniformity.
47
Medium of exchange is the most
important function of money. This
means that money is widely
accepted in payment for goods
and services.
48
Unit of account is another important
function of money. Money is used to
measure relative values by serving
as a common yardstick for valuing
goods and services.
49
Store of value is the property
of money to hold its value over
time. Money is said to be
highly liquid, which means it is
readily usable in exchange.
50
Credit cards are not money.
Credit cards represent a shortterm loan and therefore fail as
a store of value.
51
Commodity money is money
that has a marketable value,
such as gold and silver. Today,
the U.S. uses fiat money,
which must be accepted by
law, but is not convertible into
gold, silver, or any commodity.
52
M1 is the narrowest definition
of money, which equals
currency plus traveler’s checks
plus checkable deposits.
53
M2 is a broader definition of
money, which equals M1 plus
near monies, such as savings
deposits and small time deposits.
54
M3 is an even broader definition
of money, which equals M2 plus
large time deposits of more than
$100,000 or more.
55
END
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