Money and the Federal Reserve System. Four Functions of Money Medium of exchange.

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Presentation transcript:

Money and the Federal Reserve System

Four Functions of Money Medium of exchange

Money is a tool for exchanging resources for goods and services

Four Functions of Money Unit of account

Four Functions of Money Standard of deferred payment IOU

Four Functions of Money Store of Value

What has been used as money?

Wampum Belts of beads Beads made from seashells found in New York Indians made good ones Colonists didn’t

What has been used as money? Woodpecker Skulls Cowrie Shells StonesPecusWomen Tobacco Wampum CornAnimal Teeth Bark Cloth BarleyBeadsButterFeathersFish FurLiquorOatsPeasPaper Pieces SalTobaccoStringsWhale Teeth Metals

The Price Level is determined by: The relationship between the amount of money in circulation and the amount of goods and services in the economy.

Requirements of Money Confidence Scarce Even quality Maintain value

Money Supply (M1) Coins Currency Demand Deposits Other checkable accounts

MV = PQ M = money supply V = velocity of money, how many times the money supply is used to purchase final goods and services P = the price level Q = the quantity of real goods and services produced PQ = Nominal GDP

Inflation Assuming V does not change, P is determined by the relationship between the change in the amount of money in circulation and the change in real goods and services. Inflation is caused by an increase in M that is greater than an increase in Q.

The Federal Reserve (The Fed) Established by Congress with the Federal Reserve Act of 1913 Major function – maintain the proper money supply for stable price level –Too much money – inflation –Too little money - unemployment

Two other functions Banker to member banks Banker to Federal Government

Twelve Federal Reserve Districts

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