Money and Banking The Federal Reserve and Monetary Policy.

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Presentation transcript:

Money and Banking The Federal Reserve and Monetary Policy

Characteristics of Money 1. Recognizable 2. Durable 3. Portable 4. Divisible 5. Utility 6. Value (Scarcity)

Functions of Money 1. Medium of Exchange 2. Standard of Value (comparing worth) 3. Storehouse of Value (saving)

The Federal Reserve The Federal Reserve Act of 1913 created the Federal Reserve System.

Functions of the Fed 1. Supervises and regulates financial institutions 2. Issues coin and currency 3. Provides financial services to banks and the government. 4. Monetary Policy

How does the banking system “create” money? The Money Supply is limited by: 1. Federal Reserve Requirement 2. Banks limit loans 3. People don’t save money 4. Depositors withdraw their money.

Categories of money M-1 – money supply componets conforming to money’s role as a medium of exchange; coins, currency, checks and other demand deposits, traveler’s checks M-2 – money supply components conforming to money’s role as a store of value; M1, savings deposits, time deposits.

Tools of Monetary Policy Reserve Requirement – formula used to compute the amount of a depository institution’s required reserves. Open Market Operations – monetary policy in the form of U.S. treasury bills or bond sales and purchases, or both. Discount Rate – interest rate that the Federal Reserve System charges on loans to the nation’s financial institutions.

Expansionary Monetary Policy Lower interest rates Lower the reserve requirement Buy government securities

Contractionary Monetary Policy Raise interest rates Raise the reserve requirement Sell government securities

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