Chapter 10 Money and Banking

What is Barter?

A moneyless economy that relies on trade.

What is Fiat Money?

Money by government decree, which has no alternative value or use as a commodity.

What is Commodity Money?

Money that has an alternative use as an economic good, such as gunpowder, flour, or corn.

What is Specie?

Money in the form of gold or silver coins.

What is the Federal Reserve System?

A central bank of the United States, which regulates money supply, issues currency, and oversees the country's banks.  Privately owned, publicly controlled, central bank of the United States 

What are the characteristics of money?

Portable, Durable, Divisible, Scarce (in limited supply).

What are the functions of money?

Medium of exchange, money or other substances are generally accepted as payment for goods and services

Measure of value, allows money to serve as a common denominator to measure value

Store of value.allow people to preserve value for future use

What are the purposes of the Federal Reserve Bank?

Payment, Supervision on regulation, Monetary policy, Issue currency.

What are the three major parts of the Federal Reserve System?

Board of Governors, Reserve Banks, Federal Open Market Committee.

How many regional reserve banks are there in the U.S.?

• Each of the 12 banks

• Reflects the economic regions of the United States 

• Each bank has a board of directors 

  • Which of the includes 9 members 

    • 3 bankers 

    • 6 directors 

    • 6 are directors of elected bank members 

    • 3 appointed by the board of governors

    • In each board, 1 will act as deputy 

What is the composition of the board of directors at each regional bank?

9 members: 3 bankers and 6 directors, with 3 appointed by the Board of Governors.

What is the Federal Open Market Committee (FOMC)?

sets monetary policy, 7 members of the Board of Governors sit on the FOMC & all 12 chairs/presidents of the Reserve Banks sit on it as well. 

• Everyone participates in discussions & all 7 members of the Board of Governors vote, but only 5/12 Reserve Bank chairs do. 1 of 5 Reserve Banks always votes - NY, and the other 4 rotate. 

• Meet in DC 8 times per year. Set the federal funds rate, which affects interest rates that banks charge each other and/or consumers, which affects the economy as a whole.

What is Monetary Policy?

 refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money, and credit (loans and interest rates) to help promote national economic goals.

• Influences how easy it is to borrow money and how much it costs

• Promoting 2 main economic goals - price stability & maximum employment

• The Federal Reserve can adjust money policy by increasing/decreasing the money supply

• One tool of monetary policy is buying & selling of securities (bonds)

What are the goals of setting monetary policy?

Price Stability and Full Employment.

What are the tools of Monetary Policy?

• Open market operations - buying and selling of securities or bonds

• Federal Funds rate- influences the interest rates for banks, charging  for people to borrow money

• Reserve requirement - the Fed requires banks to reserve a certain percentage of money before lending

What happens when the money supply is increased?

Interest rates go down; borrowing, business activity, and employment go up.

What happens when the money supply is decreased?

Interest rates go up; borrowing, business activity, and employment go down.

Why would the Fed raise or lower the reserve requirement?

To impact the money supply and interest rates.

Who sets the interest rates for banks?

The Federal Funds rate.

The fed reserve is

the central bank of the US

economy

system by which goods and services are sold and bought