unit 4 econ

The Panic of 1907

Severe financial panic that caused many bank failures and revealed the need for banking reform and a central bank.

The FOMC (Federal Open Market Committee)

12-member committee that sets policy on government securities; includes 7 governors, the NY Fed president, and 4 rotating district presidents.

The 12 District Banks of the Fed

Regional banks in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

How the Fed Buys and Sells Bonds

Fed buys bonds → increases money supply.
Fed sells bonds → decreases money supply.

Discount Rate

Interest rate the Fed charges banks for borrowing funds.
Raising it decreases money supply; lowering it increases money supply.

U.S. Treasury vs. Federal Reserve Bank

Treasury manages government finances and issues bonds.
The Fed controls money supply and monetary policy.

Commodity Money

Money that can be eaten ie. salt

Representative Money

Money backed by something of value, like a gold certificate or check.

Fiat Money

Money that has value because the government declares it as legal tender.

Physical Characteristics of Money

Portable, divisible, durable, and uniform.

Economic Characteristics of Money

Accepted, scarce, and stable in value.

Primary Functions of Money

Serves as a medium of exchange, unit of account, and store of value.

Results of Banking Deregulation

Led to bank mergers and expanded financial services under one institution.

FDIC (Federal Deposit Insurance Corporation)

Insures bank deposits up to $250,000 per depositor to maintain confidence in the banking system.

Functions of the Federal Reserve Bank

Regulates banks, lends to banks and government, provides currency, and stabilizes the economy in emergencies.

Expansionary vs. Contractionary Policy

Expansionary: increases economic output (lower taxes, more spending).
Contractionary: decreases output (higher taxes, less spending).

How the Fed Manipulates Reserve Requirements

Lowering reserve requirements allows more lending (money supply rises).
Raising them limits lending (money supply falls).

Glass-Steagall Act (1933)

Separated commercial and investment banking to reduce risky speculation after the Great Depression.

Difference Between M1 and M2

M1: currency, demand deposits, and traveler’s checks.
M2: M1 plus savings accounts, CDs, and mutual funds.

How Money Is Created (Fractional Reserve Banking)

Banks keep a fraction of deposits and lend the rest, expanding the money supply through loans.

Liquidity

Ease with which an asset can be converted into cash.

Inflation

Overall rise in prices that decreases purchasing power.

Wildcat Banking Era (1837–1863)

Period of little regulation when private banks issued their own paper currency.

Federal Reserve Act of 1913

Created the Federal Reserve System and divided the country into reserve districts.

Monetarism

Belief that controlling the money supply helps stabilize the economy.

The Three Tools of the Fed

1. Reserve requirements

2. Open market operations

3. Discount rate

Monetary Policy

Managed by the Federal Reserve to control money supply and interest rates.

Fiscal Policy

Managed by Congress and the President to adjust government spending and taxation.