AP Macroeconomics Chapter 29 & 30 Notes Money, Banking, & the Fed AP Macroeconomics Chapter 29 & 30 Notes

Money Definition: anything that can be used as a medium of exchange, measure of value, and a store of value

Why not BARTER? barter = trade barter economy – an economy based on trade Not most efficient system because it requires a “mutual coincidence of wants” (each person must have exactly what the other wants—also called “double coincidence of wants”)

Three Types of Money 1) Commodity money – money that has an alternative use as an economic good 2) Representative money – money that is backed by a commodity 3) Fiat money – money that has value because of government decree What phrase is printed on the top left corner of U.S. currency?

“This note is legal tender for all debts, public and private” Three Types of Money “This note is legal tender for all debts, public and private” legal tender – fiat money that must be accepted as payment for purchases/debts

Characteristics of Money Portable Durable Divisible Stable Scarce (limited in supply) Accepted

Three Functions of Money Medium of exchange – something accepted by all parties as payment for goods and services

Three Functions of Money Measure of value – common measuring stick to express the worth or value of a good

Three Functions of Money Store of value – quality that allows purchasing power to be saved until needed

Money U.S. currency is printed by the U.S. Dept. of the Treasury’s Bureau of Printing and Engraving. U.S. coins are created by the U.S. Mint. This money is distributed to banks by the Federal Reserve Bank (also known as “the Fed”). Our currency is known as “Federal Reserve Notes.” There are currently about $829 billion in circulation. (most outside the U.S.)

Money Terms Demand deposit accounts (DDAs) – funds deposited in a bank that can be accessed by writing a check and without having to secure prior approval from the bank (Ex.: checking accts)

Categories of Money M1 – coins, currency, checks, checking accounts / DDAs [relates to money’s function as a medium of exchange]

Types of Money M2 – M1 + savings accounts, money market accounts, CDs (time deposits) [relates to money’s function as a store of value]

Types of Money M3 – M2 + Institutional money market & long-term savings accounts (large time deposits) [relates to money’s function as a store of value & unit of accounting]

(M)(V)=(P)(Q) Equation of Exchange M=money supply (M1) V=velocity (# of times the avg. $ changes hands in a year) P=price levels (current) Q (or Y)=real GDP/output [PQ=nominal GDP]

(M)(V)=(P)(Q) Equation of Exchange What will happen if the money supply increases, but velocity remains constant? What will happen if velocity increases, but M remains constant?

The Federal Reserve Bank ECONOMICS Chapter 14

The Federal Reserve (the Fed) The privately-owned (owned by the people—stockholders of private banks), publicly-controlled (the President selects the Fed Chairman and appoints the Board of Governors) central bank of the United States

The Federal Reserve (the Fed) Has the power to lend to banks to prevent bank runs

FDIC In 1933, the U.S. government created the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits up to $250,000 per customer per bank.

Fractional Reserve System Why couldn’t George give his customers their money? Where was it?

Fractional Reserve System Banks make money when they make loans to their customers and charge them interest. Banks are only required to keep a portion of all deposits. The Fed decides what percentage of all deposits banks must hold (reserve requirement / reserve rate). [Current=10%] Banks can take the remaining money and lend it to customers.

Structure of the Fed Directed by a 7-member Board of Governors Each app’ted by President to 14-yr. term Country is divided into 12 districts, each served by a district bank New York -Chicago Boston -Cleveland Richmond -Atlanta Dallas -St. Louis Kansas City -Philadelphia Minneapolis -San Francisco

Structure of the Fed Federal Open Market Committee (FOMC) 12 members – 7 governors, pres of NY Fed, and 4 other Fed district presidents Evaluates state of economy and determines interest rates

Fed Chairman The head of the Federal Reserve is known as the Chairman. The current Chairman of the Fed is Ben Bernanke.

Fed Responsibilities Main responsibility: controlling the rate of growth of the money supply Acting as the government’s bank Maintaining the payments system [Ex.: you swipe debit card @ Zaxby’s, Fed makes sure your $ gets from your bank to Zaxby’s bank] Regulating & supervising banks Preparing consumer legislation [Ex.: making sure that businesses treat consumers fairly and disclose all information in credit transactions]

AP Macroeconomics Chapter 29 & 30 Notes MONETARY POLICY AP Macroeconomics Chapter 29 & 30 Notes

Macroeconomics macroeconomics—analysis of the overall national economy We can measure the health of the national economy by assessing THREE factors: GDP Unemployment Inflation

A HEALTHY Economy The economy is considered healthy if: There is a sustained increase in real GDP (economic growth) Unemployment is low Prices are stable (or there is minimal inflation) [On business cycle = Expansion/Recovery]

An UNHEALTHY Economy The economy is considered unhealthy if: There is a sustained decrease in real GDP Unemployment is high Excessive inflation (or deflation) exists [On business cycle = Contraction/Recession]

Ensuring Economic Stability *In order to make sure our economy is stable (economic stability – reduction of extreme ups & downs in the business cycle & standard of living), the federal government steps in with… Macroeconomic stabilization policies – attempts by the federal government to keep the economy healthy and to make the future more predictable

Economic Stabilization Policies **The two types of stabilization policies are fiscal & monetary policy. Monetary policy attempts to either INCREASE or DECREASE the money supply.

Economic Stabilization Policies **Policy can be expansionary or contractionary. Expansionary increases the money supply, which spurs economic growth, because it increases demand. (loose $) Contractionary decreases the money supply, which can curb inflation and slow down spending and can slow down economic growth. (tight $)

Economic Stabilization Policies monetary policy – changing the rate of growth of the supply of money in circulation (specifically, to curb inflation or deflation) *Implemented by the FED

Three Tools of Monetary Policy open market operations – when the Fed buys and sells securities (government bonds) on the open market contractionary: selling securities / bonds expansionary: buying securities / bonds

Three Tools of Monetary Policy reserve rate – the amount of deposits the bank must keep “on reserve” (i.e., stored in their vault or deposited in their local Federal Reserve branch bank) contractionary: raising the reserve rate expansionary: lowering the reserve rate

Three Tools of Monetary Policy discount rate – the interest rate on loans made by the Federal Reserve to banks contractionary: raising the discount rate expansionary: lowering the discount rate

Effects of Monetary Policy Federal funds rate – interest rate banks charge each other **The Fed “targets” this interest rate to** change the amount of $ in the money supply!

Effects of Monetary Policy prime rate – interest rate banks charge their best customers (affected by the discount & fed funds rate)