1. Wednesday, December 13th
GDP Quiz GDP – Any Questions? (Review) Take Some Notes: Banking and The Fed Activity: CPI Market Basket Just A Few More Notes Begin Worksheet

2. Economic Instability
& the Federal Reserve

3. Bank Accounts
Do you have a bank account? personally, or a joint account
Let’s talk about interest – the profit of banks
How does inflation impact interest rates?

4. CPI: Market Basket What is a Market Basket?
Food and beverages such as cereal, milk and coffee
Housing costs and bedroom furniture
Apparel, transportation expenses, and medical care costs
Recreational expenses including pets, toys and admissions to museums
Education and communication expenses
And a few random items such as tobacco, haircuts and funerals

5. CPI: Market Basket What would a student’s Market Basket look like?
Work alone or in groups of 2 or 3
Make a list of 5-10 goods or services that would help an economist compare the cost of being a high school student from this year to the next
Discuss what effect inflation will have on your basket

6. Banking History
Prior to the development of the Federal Reserve in 1913, banks failed a lot. Bank runs became all too common. Solvent = stay open Insolvent = doors closed… Failed bank

7. Federal Reserve Bank
President Woodrow Wilson signed the Federal Reserve Act into law in 1913.
Click Here

8. The Fed Short for “The Federal Reserve”
Created in 1913 by an Act of Congress
Two goals:
Prevent panic withdrawals
Make cross-country payments (especially checks) easier and more efficient
Centralized in Washington, DC

9. Fed Geography

10. Types of Banks Commercial Bank Investment Bank
Manage deposit accounts such as checking and savings accounts, for individuals and businesses
Make loans to the public using the money held on deposit
Investment Bank
Facilitate the buying and selling of stocks, bonds and other investments
Help companies to go public with initial public offerings (IPO)

11. Good Economies Have… Positive GDP Growth Low unemployment
Relatively low inflation (~2%)
Increasing GDP per capita
Stable economic institutions

12. GDP Per Capita

13. The Quantity Theory of Money
(M) * (V) = (P) * (Y) where:
M = Amount of Money in Supply
V = Velocity (how fast is the money being spent)
P = Price Level
Y = Real GDP

14. Fed Targets
Using this formula, the Fed can use the tools available to them to try to make the economy better
In general, it is assumed that an economy needs to have more money to keep it working
Think of it as “greasing the gears” of the economy
When the Fed gets more money into the economy, it (theoretically) grows the economy
This makes everything better (hopefully)

15. Three Tools of the Fed Open Market Operations Discount Rate
This is the process of buying and selling US Government Debt (government bonds) on the open market
Discount Rate
This is the interest rate that banks are charged when borrowing from the Federal Reserve
Reserve Requirement
This is the percentage of its liabilities (deposits) that a bank must hold on to and cannot loan out.

16. More Tools
All of these tools have the power to increase (or decrease) the money supply
Countercyclical monetary policy
In theory, this should make the economy more stable, which is good

17. Criticism

18. Fiscal v. Monetary Fiscal Policy Monetary Policy
Controlled by the federal government (usually) and sometimes states
Idea is to increase government spending, cut taxes, etc., to stimulate economy
Controlled by the Federal Reserve
Focus is on making money “loose”
Three tools of the Federal Reserve