Wednesday, December 13th GDP Quiz GDP – Any Questions? (Review) Take Some Notes: Banking and The Fed Activity: CPI Market Basket Just A Few More Notes Begin Worksheet

Economic Instability & the Federal Reserve

Bank Accounts Do you have a bank account? personally, or a joint account Let’s talk about interest – the profit of banks How does inflation impact interest rates?

CPI: Market Basket What is a Market Basket? Food and beverages such as cereal, milk and coffee Housing costs and bedroom furniture Apparel, transportation expenses, and medical care costs Recreational expenses including pets, toys and admissions to museums Education and communication expenses And a few random items such as tobacco, haircuts and funerals https://www.investopedia.com/terms/c/consumerpriceindex.asp

CPI: Market Basket What would a student’s Market Basket look like? Work alone or in groups of 2 or 3 Make a list of 5-10 goods or services that would help an economist compare the cost of being a high school student from this year to the next Discuss what effect inflation will have on your basket

Banking History Prior to the development of the Federal Reserve in 1913, banks failed a lot. Bank runs became all too common. Solvent = stay open Insolvent = doors closed… Failed bank

Federal Reserve Bank President Woodrow Wilson signed the Federal Reserve Act into law in 1913. Click Here

The Fed Short for “The Federal Reserve” Created in 1913 by an Act of Congress Two goals: Prevent panic withdrawals Make cross-country payments (especially checks) easier and more efficient Centralized in Washington, DC

Fed Geography

Types of Banks Commercial Bank Investment Bank Manage deposit accounts such as checking and savings accounts, for individuals and businesses Make loans to the public using the money held on deposit Investment Bank Facilitate the buying and selling of stocks, bonds and other investments Help companies to go public with initial public offerings (IPO)

Good Economies Have… Positive GDP Growth Low unemployment Relatively low inflation (~2%) Increasing GDP per capita Stable economic institutions

GDP Per Capita

The Quantity Theory of Money (M) * (V) = (P) * (Y) where: M = Amount of Money in Supply V = Velocity (how fast is the money being spent) P = Price Level Y = Real GDP

Fed Targets Using this formula, the Fed can use the tools available to them to try to make the economy better In general, it is assumed that an economy needs to have more money to keep it working Think of it as “greasing the gears” of the economy When the Fed gets more money into the economy, it (theoretically) grows the economy This makes everything better (hopefully)

Three Tools of the Fed Open Market Operations Discount Rate This is the process of buying and selling US Government Debt (government bonds) on the open market Discount Rate This is the interest rate that banks are charged when borrowing from the Federal Reserve Reserve Requirement This is the percentage of its liabilities (deposits) that a bank must hold on to and cannot loan out.

More Tools All of these tools have the power to increase (or decrease) the money supply Countercyclical monetary policy In theory, this should make the economy more stable, which is good

Criticism

Fiscal v. Monetary Fiscal Policy Monetary Policy Controlled by the federal government (usually) and sometimes states Idea is to increase government spending, cut taxes, etc., to stimulate economy Controlled by the Federal Reserve Focus is on making money “loose” Three tools of the Federal Reserve