Chapter 10 Money and Banking

Review for Money and Banking test.

Selections from Chapter 10,  Chapter 12 and Federal Reserve Videos

Barter- A moneyless economy that relies on trade 

Fiat money - money by government decree, has no alternative value or use as a commodity

Commodity money- Money that has an alternative use as an economic good; gunpowder, flour, corn, etc

Specie- Money in the form of gold or silver coins 

Federal Reserve System/Bank- 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 

Characteristics of money (p.279)

• Portable

• Durable

• Divisible

• Scarce (in limited supply)

Functions of money (p. 280)

• 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

Purposes of the Federal Reserve Bank

• Payment

• Supervision on a regulation

• Monetary policy

• Issue currency

Three Major Parts   

• Board of Governors 

• Reserve Banks 

• Federal Open Market Committee 

How many regional reserve banks are there = 12 

• 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 

Define Federal Open Market Committee and its purpose-  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.

Define 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)

Goals of setting monetary policy: 

1. Price Stability 

2. Full Employment

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 or decreased? Think about interest rates, borrowing, business activity, and employment. (arrows) Money supply is the total amount of money in the economy 

Money supply is increased; interest rates go down; borrowing goes up; business activity goes up; employment goes up (unemployment goes down)

Money supply is decreased: interest rates go up; borrowing goes down; business goes down; employment goes down (unemployment goes up)

Reserve requirement - why would the Fed raise or lower it? Impact on money supply and interest rates?

Baking is a high-risk business 

The Federal Funds rate is in charge of setting the interest rates for banks