Money and Banking Overview

• Barter Economy: Trading goods directly for other goods.

• Fiat Money: Currency that has value because a government maintains it and people have faith in its value; not backed by a physical commodity.

Functions of Money

1. Medium of Exchange: Facilitates transactions.

2. Store of Value: Maintains value over time as long as inflation is stable.

3. Measure of Value: Allows comparison of worth among goods and services.

4. Standard for Future Payments: Establishes a consistent basis for agreements.

Types of Currencies

1. Hard Currency: Strong economic success, political stability.

2. Exchange Controls: Currency limited to use within a specific country; non-convertible.

3. Soft Currency: Valid only within a country or its regions.

Factors Contributing to Hard Currency

• GDP Size: Greater economic production leads to stronger currency.

• Inflation: Low or no inflation strengthens currency.

Historical Context of Banking

• Gold Standard: Historically, currency value was based on gold.

• Key Event in 1971: Nixon caused a significant change by taking the dollar off the gold standard, changing the exchange rate to $100 per ounce of gold.

Federal Reserve System (FRS)

• Regulates Monetary Policy: Influences interest rates, money supply, commercial bank activities.

• Establishment: Created by Congress in 1913, operational in 1914.

• Structure: Divided into 12 districts based on economics and population.

Features of the FRS

• Leadership: Appointed by president and congress; chairman serves a 4-year term.

• Charter Membership: Commercial banks must pay a membership fee of 6% to join, gaining several benefits such as FDIC insurance.

Interest Rates

1. Discount Rate: Lowest available rate from FRS to commercial banks.

2. Prime Interest Rate: Rate charged to top customers of banks.

   • Prime rate = Discount rate + 1-2%.

3. Regular Interest Rate: Rate for average individuals.

   • Regular rate = Prime rate + 1-2%.

Implementation of Monetary Policy

Tools Used

1. Quantitative Policy: Influence general economy.

   • Legal Reserve Requirements: Determines how much money banks must hold versus what they can lend.

   • Discount Rate Adjustments: Impact borrowing during economic conditions.

   • Open Market Operations: Buying/selling government securities to influence money supply.

Further Monetary Policies

• Qualitative Controls: Target specific industries to change conditions based on economic needs.

  • Housing Impact: Adjust interest rates/terms to stimulate or curb home buying.

  • Durable Goods Impact: Similar adjustments for larger purchases like cars and furniture.

Employment and Unemployment Analysis

• Labor Force: Comprises individuals aged 16+ who are actively seeking work.

• Employment Types: Include underemployment, seasonal, frictional, cyclical, structural, technological, hardcore, and entry unemployment.

International Trade Dynamics

Business Organizations in Trade

1. International Corporations: Produce and export solely from US.

2. Multinational Corporations: Operations in the US and other countries.

3. Transnational Corporations: Joint ownership across nations.

Trade Blocs and Their Importance

• Definition: Agreements between multiple countries to improve trade conditions among them.

• Maquiladora Program: Tax-free arrangements for American companies in Mexico.

Free Trade Agreements

• NAFTA/USMCA: Aimed to facilitate trade among the US, Canada, and Mexico, stipulating product origin rules to encourage domestic production.