1. Unit 6: Federal Reserve System and Monetary Policy

2. Topic 1: Money

3. Functions of Money

4. 1. Medium of Exchange
It is accepted as a form of payment

5. 2. Unit of accounting
helps to determine the value of an item and allows comparison

6. 3. Store of value
Money can be saved for use in future

7. Characteristics of money ?
Durable
Divisible
Scarce
Portable . 7

8. Money Systems: 1. Barter system
People trade one object for another

9. 2. Commodity money system
An item with intrinsic value is used as money
Examples:
Cigarettes used in prison
Animal furs used in colonial times

11. 3. Representative Money System
Money “backed” by something
Example: The Gold standard; people didn’t carry around the gold, they had a gold certificate that represented the gold

12. *4. Fiat money system Money that is declared so by the government
It is not “backed” by anything

13. Topic 2: The Federal Reserve and the Banking System

14. The Federal Reserve System (the FED)
The FED is the central bank of the U.S.
Created in 1913

15. Jobs of the FED Print money Clear checks Supervise banks
Act as a bank to banks
Manage money supply

16. Organization of the FED
Member banks

17. Board of Governors - Head of the Federal Reserve System
Chairman of the Board of Governors???

18. Federal Reserve System
12 Districts

19. Federal Reserve Banks: 12 Districts

20. Member Banks FDIC insured (Federal Deposit Insurance Corporation)
Insures money in banks up to $250,000

21. FDIC
Bank run “It’s a Wonderful Life”
60 minutes video: FDIC

22. Topic 3: Banks and the Money supply

23. Fractional Reserve Banking
If you have a bank account, where is your money?
Only a small percent of your money is in the safe. The rest of your money has been loaned out.
This is called “Fractional Reserve Banking”
The FED sets the amount that banks must hold 23

24. Demand DEPOSIT Money placed in banks by customers
Banks take these deposits and loan them out to people who want to borrow money

25. Reserve Requirement
Amount of money a bank is required to hold of a person’s deposit

26. EXCESS RESERVE
Deposit that is not part of the required reserve

28. Practice:
If a $100 deposit is placed in a bank and the reserve requirement is 20%, how much money does the bank have to hold?
How much can they loan out?

29. Practice
If $50 is deposited into a bank and the reserve requirement is $10%, how much is the bank required to hold?
How much can they loan out?

30. If $10 is deposited into a bank and the reserve requirement is 10%, how much money must the bank hold?
How much money can they loan out?

31. The process of how banks “create” money
Banks only influence the amount of $ in the economy if they make loans.
When a loan is taken out, it is spent and ends back up in the banking
System
Example: complete the chart assuming the reserve requirement is 10%
Bank
Deposit
Reserve requirement
Loan A
$1000
$100
$900 B C

32. The process of how banks “create” money
Deposit
Reserve requirement
Loan A
$1000
$100
$900.00 B
$900
$90
$810.00 C
$810
$81.10
$728.90

33. The Money Multiplier
Used to determine how much a loan can impact the overall economy
Money
Multiplier
Reserve Requirement (ratio) 1 = 33

34. What is the Money multiplier on the following reserves?
10%
20% 5%

35. Maximum change in the money supply =
Money multiplier X Deposit = total - deposit
Example: Billy deposits $400 in his bank and the
reserve requirement is 10%.
What is the money multiplier?
What is the maximum change in the money
supply?

36. THE MULTIPLE EXPANSION of money will be less if:
1. Banks DO NOT loan out all of their excess
2. People DO NOT spend all the money that they borrow
3. When money is spent, it is NOT placed back into a bank

37. Practice:
$50 is deposited into a bank and the reserve requirement is 10%. What is the total expansion of the money supply
Money multiplier = ?
Money multiplier X deposit (-deposit) = ?

38. $20 is place as a deposit into a bank and the reserve requirement is 25%. What is the total expansion of the money supply?
Money multiplier = ?
Money multiplier X deposit (-deposit) =?

39. 3. $100 is deposited into a bank and the reserve requirement is 5%, what is the multiple expansion of money?
Money multiplier = ?
Money multiplier X deposit (-deposit) = ?

40. Video: Inside the Fed

41. Topic 4: Monetary Policy
What the FED does to regulate the money supply
The FED controls the money supply by adjusting Nominal interest rates

42. Expansionary monetary policy
Implemented during Recession
Goal is to speed up the economy; they want people to get out and spend $ in economy

43. Contractionary Monetary Policy
Implemented during INFLATION
Goal = slow down the economy; want less spending to occur in the economy

44. Video:
Monetary policy: Part Art, Part Science

45. Tools of monetary policy
The FED adjusts the money supply by changing any one of the following:
Change the reserve requirement
2. Changing the Discount rate
Discount Rate- Interest rate the FED charges banks to borrow money
**3. Open Market Operations
Buying and selling Bonds (securities)

47. Expansionary monetary policy
Implemented during RECESSION
Goal is to SPEED UP

48. How can the Fed speed up the economy?
1. BUY BONDS using open market operations (BUY = BIG)
2. LOWER the reserve requirement
3. LOWER the discount rate of interest

49. Impact of expansionary monetary policy
Banks have more money to lend
Interest rates go down
People borrow more money due to low interest rates
People save less money due to low interest rates
People spend more money

50. Contractionary Monetary Policy
Implemented during INFLATION
Goal is to SLOW DOWN economy

51. How can the Fed slow down the economy???
1. SELL BONDS using open market operations (SELL = SMALL)
2. RAISE the reserve requirement
3. RAISE the discount rate of interest

52. Impact of Contractionary Policy
Banks have less money to lend
Interest rates go up
People borrow less money due to high interest rates
People save more money due to high interest rates
People spend less money