1. How Banks Create Money
IB Economics, 3.4

2. Review: Functions of Money
Commonly, individuals hold money for three reasons.
Money acts as a medium of exchange -Used to purchase goods and services
Money is used as unit of account -Used to compare the value of different goods and services
Money is a store of value -Held to buy something in the future

3. Review: Supply of Money
Important for Price Stability & Economic Growth
Too much money → causes inflation Germany after WWI, German government printed so much money that prices increased 5,470% in 1923.
Too little money → falling prices & production U.S Ms fell 30%. Many economists agree this was a major cause of Great Depression.
Federal Reserve controls the money supply through monetary policy.
Monetary policy works by encouraging or discouraging banks from making loans.

4. The Federal Reserve System
The Fed was created in 1914 after a series of bank failures
The Fed Board of Governors:
7 Members appointed by the President, with confirmation by the Senate
Board members serve 14-year terms
President appoints the chairperson to a 4-year term
12 Regional Federal Reserve Banks
Regional banks are located in major cities around the country
Each bank has a president chosen by the bank’s board of directors
The board of directors is typically drawn from the local business and banking community

5. REVIEW: Purpose of Monetary Policy is to:
Encourage economic growth
Promote employment
Control inflation
Build a sustainable balance of trade in the international markets

6. REVIEW: Can you put that in English?
Basically, the Fed is charged with controlling the amount of money in circulation.
Fed policy can increase or decrease the money supply, which increases or decreases interest rates.
Decrease
Interest Rates
Decrease
Money Supply
Increase
Money Supply
Increase
Interest Rates
Leads to
Leads to

7. REVIEW: How does monetary policy impact me?
Federal Reserve actions influence
interest rates
purchasing power
prices of goods and services
potential job growth
exchange rates

8. Now let’s work with Reserves…