1. CHAPTER 10 ECONOMICS, MR. VIOLANTI Money, Banking, and the Federal Reserve System

2. What is Money??? A History of Money, Part ONEPart ONE Developed through history  Barter System: Trade, many difficulties  A medium of exchange was needed

3. What gives money value? General acceptability, and scarcity. Money lowers transaction costs over a barter economy. Three Functions of Money  Medium of Exchange  Unit of Account  Store of Value Beginnings of Banking: Transportation of Gold, issue paper receipts. Leads to FRACTIONAL RESERVE BANKING.

4. The Money Supply Money Supply (M1) consists of 3 components  Currency (coins, paper money)  Checking Accounts  Traveler’s Checks August, 2005: $710 Billion currency in circulation, $619 Checking Accounts, $7 traveler’s checks Near Money: Savings accounts, non-checking bank accounts Credit Cards are considered loans US Dollar Symbology

5. US Currency

6. Federal Reserve System 1913, Congress passes the Federal Reserve Act  Sets up Federal Reserve System, “The Fed”  Central Bank, chief monetary authority Central Bank determines:  Determines Money Supply  Supply economy with Federal Reserve Notes (Money)  Holds Bank reserves  Supervises Banks  Lender of Last Resort 12 Federal Reserve District Banks

9. Role of Banks in Money Supply Reserve account + Vault Cash = total reserves  Required Reserve  Excess Reserves They “create” money through  Checking Accounts  Loans of existing deposits

11. Role of FED in changing Money Supply 1. Changing the Reserve Requirement  RR MS 2. Open Market Operations  Buy Gov. Securities MS  Sell Gov. SecuritiesMS 3. Changing the Discount Rate  IR MS