Functions of Money A medium of exchange: people are willing to accept in exchange for goods and services A standard of value: a measure of value that allows people to compare the values of goods and services using prices Store of value: allows people to save for future consumption ©2012, TESCCC

Properties of Money Durable: it lasts even after years of use Portability: you can take it anywhere Divisibility: must be easily divided into smaller denominations Uniformity: money must be the same within a country Limited Supply: if there is too much in circulation, the value drops and may even become worthless Acceptability: people may use it to buy other things ©2012, TESCCC

Characteristics of Money Commodity Money: items that have value in themselves other than being used as a monetary unit (gold, tobacco, salt…)

Characteristics of Money Representative Money: items that have no value in themselves but can be exchanged for something of value (gold certificates, silver certificates, checks…)

Characteristics of Money Fiat Money: Money that has value simply because the government has decreed it to be an acceptable means to pay debts (Federal Reserve Notes) ©2012, TESCCC

*Pros *Cons use what you have don’t go into debt good for emergencies, can build credit, can replace if lost can’t go into debt, can replace if lost difficult to set up rates, doesn’t last if it’s lost it’s gone can go into debt, can replace if lost Must have that money in your account Bartering Currency Credit Cards Debit Cards

Financial Institutions Includes Banks, Credit Unions, Savings and Loans What do they do for consumers? Intermediaries between savers and borrowers Convenient and safe place to store money Provide commercial and personal loans and mortgages

TYPES OF ACCOUNTS at Financial Institutions INSURED BY FICA Checking – easy to liquidate, safe Savings – easy to liquidate, low risk, earn interest Money Market – higher interest rate than savings, low risk (liquidity – easy to get to your money) Mutual Funds, Stocks & other investments are NOT insured but the return on your investment is higher.

12 banks The 12 banks are instruments of the government but not owned by the government. over5,000 banks The over 5,000 banks in the $1 per share) 12 districts buy stock ($1 per share) in their district bank 6% dividends (& get 6% dividends [no capital gains]) so the banks are owned by citizens privately owned. Serving the public, it is owned by citizens. corporation owned by the banks The 12 banks are a corporation owned by the banks in their districtspublicGagency in their districts, but a public (G) agency directly responsible to Congress. $30 billion They might make $30 billion in one year and turn 90% of that over to the Treasury 90% of that over to the Treasury. THE FEDERAL RESERVE Fed

Four Part Structure of the Fed Seven Board of Governors Seven Board of Governors  most important body of the Fed  appointed by the President  appointed by the President and confirmed by the Senate  14-year termsstaggered  14-year terms are staggered one replaced each two years (one replaced each two years) they arepaid $162,100 [they are paid $162,100]  isolation from political pressure (only one 14 year term) Chairmanserves onlyfour years  the Chairman serves only four years but can be reappointed4-year renewable term4 times reappointed [4-year renewable term] 4 times pay is $180,100  His pay is $180,100.  E very president appoint at  E very president gets to appoint at least twoClinton appointed 8 least two. Clinton appointed 8 & Bush appointed 41 st 2 years & Bush appointed 4 in 1 st 2 years.  One term begins every 2 years on Feb. 1 of even numbered years.

Federal Open Market Committee [FOMC] 2. Federal Open Market Committee [FOMC] main policy-making arm -Fed ’s main policy-making arm Board of Governors -includes 7 Board of Governors, NY Fed President [who is vice chairman, and is the second chairman, and is the second most important in the system most important in the system The 4 other bank presidents The 4 other bank presidents rotateother 11 rotate among the other 11 every 3 years. every 3 years. other 7 bank presidents are -other 7 bank presidents are non-voting members non-voting members meet every six weeks -they meet every six weeks

Monetary Policy Federal Reserve policy of regulating the availability of money and credit in the economy to deal with economic instability. © 2010, TESCCC

Major Tools of the Fed 1.Reserve Requirement- the percentage of total deposits that the Fed requires banks to hold back and not loan out 2.Discount Rate- Interest rate the Fed charges member banks 3.Open Market Operations-FOMC or Federal Open Market Committee buys and sells government bonds and securities. © 2010, TESCCC

Easy Money Policy Recession phase of business cycle Unemployment is the problem Goal is to increase the money supply Fed’s Major Tools 1.Reserve Requirement- Decrease reserve requirement. More money available for banks to loan out. More loans will create more money in the economy. © 2010, TESCCC

2.Discount Rate – Decrease discount rate. Makes it cheaper for banks to get a loan from the Fed, so banks will charge lower interest rate to you. This makes getting a loan more attractive so more people will get loans. 3.Open market – The Fed will buy on the open market. The Fed will purchase government securities with money. This is money that had not been out in the economy so this will increase the money available in the economy. © 2010, TESCCC

Tight Money Policy Expansion phase of business cycle Inflation is the problem Goal is to decrease the money supply 1.Raise Reserve Requirement- This will cause banks to have less money available for loans. Less loans will mean that less money is created in the economy so this will decrease the money supply. © 2010, TESCCC

2.Raise Discount Rate- This will make it more expensive for a bank to get a loan from the Fed so banks will increase the interest rates that they charge individuals. Higher interest rates will make getting a loan less attractive so fewer people will get loans. 3. Sell on open market- FOMC will sell government securities on the open market. The Fed takes this money and locks it up in the vault at the Fed so this decreases the available money in the economy. © 2010, TESCCC

Sample Questions *Liquidity *low risk *low return *lawfully insured *Safe place to store money 1.The above characteristics would describe all EXCEPT: A.Mutual Funds B.Savings account C.Money Market Convenient and safe place to store money Intermediaries between savers and borrowers Provide commercial and personal loans and mortgages 2.What is the best category for the list above? A.Functions of Government Agencies B.Functions of Scientific Institutions C. Functions of Financial Institutions D. Functions of Not­for­Profit Agencies

3. Fiat money- _______ A.Money that isn’t valuable but represents something that is B.Money that has value because the government says it does C.A form of money that has value in it’s own right (intrinsic value) 4. Which method of payment allows people to spend more than they have and create debt? A.Bartering B.Currency C.Credit Cards D.Debit Cards 5. Which method above are limited to what you have in the bank?

6.Our nation’s central bank is the Federal Reserve. It is owned by the _____ banks and is governed by the 7 members of the ______. A.member, FOMC B.member, Board of governors C.Government, Bank committee of congress D.Government, Presidential cabinet 7.The __________ appoints the members of the Federal Reserve and the chairperson. The appointments must be approved by ______. A.President, Congress B.President, Senate C.Senate, President D.FOMC, Senate

8.Tools used to implement Monetary Policy include all of the following EXCEPT: A.Open market B.Congress C.Reserve Requirement D.Discount Rate 9. Nationally chartered banks, appointed by President, 12 districts, 14 year terms; this describes the ________. A.Banking system B.Monetary Policy C.Stock Exchange D.Federal Reserve

10. The unemployment rate has risen to 9.1%. GDP has dropped for the second quarter in a row Which phase of the business cycle is being described, and what tool would the Federal Reserve Board of Governors most likely suggest to be used? A expansion... easy money policy B recession... lower the discount rate C expansion... lower the reserve requirement D recession... tight money policy 11. More money is required to be kept in bank reserves and less is available to be loaned out to businesses to invest in the economy. What is the Federal Reserve doing in the above example. A Decreasing the Reserve Requirement B Increasing the Reserve Requirement C Selling Bonds D Decreasing interest rates. 12 Interest Rates are lowered to _________ the money supply. This is an example of _____ Money Policy. A decrease…………Tight B decrease………….Easy C increase ……… Tight D increase…………Easy

ANSWERS Make sure you answer the questions BEFORE looking at the answers. STUDY what you missed. 1.A 2. C 3. B 4. C 5. D 6. B 7. B 8. B 9. D 10. B 11. B 12. D