1.  How should you spend, save, and invest your money?

2.  Economists define money as anything that is generally accepted as a means of payment  Money has three basic functions: o Medium of exchange Easier than a barter Legal tender o Standard of value Measure and compare the value of all kinds of goods and services using one scale. o Store of value Holds value over time Purchasing power

3.  Acceptability  Scarcity o Needs to be scarce to be valued by buyers and sellers  Portability  Durability  Divisibility o Must be easy to divide into small amounts  Uniformity

4.  Commodity money o Gold, silver, salt, cattle, shells, beads, furs, tobacco, etc. o A commodity, a good that has value in trade, becomes commodity money when it is used as a means of exchange.  Banks o Receive deposits, make loans o Issue banknotes Commodity-backed money Forerunner to modern printed money  Fiat money o Printed by the government o Not backed by gold, silver, or any other commodity o Money backed “on the full faith and credit of the US government

5.  The central bank of the United States o Created December 23, 1913 in response to a series of financial panics  What does the Fed do? o Supplies the economy with cash Elastic currency Supply of currency that expands and contracts with the needs of business. o Holds reserves for depository institution Requires banks to hold a percentage of its deposits in reserve o Banker to the federal government o Processes checks and electronic transfers of funds o Supervises and regulates banking institutions o Regulates the money supply

6.  Manages the banking system o Controls the nation’s money supply Issues Federal Reserve notes Aim to provide liquidity– consumers and businesses have money o Seven member Board of Governors oversees the Federal Reserve System o Twelve regional Federal Reserve Banks o Federal Open Market Committee (FOMC) Board of Governors President of the Federal Reserve Bank of New York Presidents of four other Federal Reserve Banks on a rotating basis Fed Chairman

7.  Monetary decisions are made by the Federal Open Market Committee (FOMC) o To stimulate the economy, lower the cost of borrowing Discount rate The interest rate that commercial banks can borrow funds directly from the Fed. Stigma- borrowing from the Fed means that the bank can’t raise the funds it needs privately “Thus, turning to the Fed for a loan is similar to borrowing from your parents after the age of about twenty-five: you will get the money, but it’s better to look somewhere else first.” Charles Wheelen Generally, banks borrow from other banks, not the Fed. o Increase the money supply: Fed buys government bonds from banks, allowing them to put more money into the economy. Lowers interest rates The cost to borrow money Companies can borrow more money at lower rates, which promotes spending, stimulates the economy, and creates jobs. Can cause inflation, affecting the purchasing power of money.

8.  The opposite is done to decrease money supply: o Fed sells government bonds to banks, decreasing the amount of money circulating in the economy. Raises interest rates Cost to borrow money increases, spending slows.  Why decrease the money supply? o To control inflation “The most instructive way to think about inflation is not that prices are going up, but rather that the purchasing power of the dollar is going down.” – Charles Wheelen

9.  The Fed is in charge of: o Facilitating the rate of economic growth that is neither too fast or too slow. However… No one knows the “speed,” or growth, of the economy The tools the Fed has to fix the economy do not immediately solve the problem Congress and the president might be making decisions about fiscal policy that affect the monetary policy of the Fed. And world events out of our control affects the Fed.

10.  Article I, Section 8 of the US Constitution  The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;ImpostsExcisesDefenceWelfareImpostsExcises  To borrow money on the credit of the United States;  To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;  To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;  To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;  To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;  To establish Post Offices and Post Roads;Post Roads  To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;  To constitute Tribunals inferior to the supreme Court;  To define and punish Piracies and Felonies committed on the high Seas, and Offenses against the Law of Nations;  To declare War, grant Letters of Marque and Reprisal, and make Rules concerning Captures on Land and Water;Letters of MarqueReprisal  To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years;  To provide and maintain a Navy;  To make Rules for the Government and Regulation of the land and naval Forces;  To provide for calling forth the Militia to execute the Laws of the Union, suppress Insurrections and repel Invasions;  To provide for organizing, arming, and disciplining, the Militia, and for governing such Part of them as may be employed in the Service of the United States, reserving to the States respectively, the Appointment of the Officers, and the Authority of training the Militia according to the discipline prescribed by Congress;  To exercise exclusive Legislation in all Cases whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of particular States, and the acceptance of Congress, become the Seat of the Government of the United States, and to exercise like Authority over all Places purchased by the Consent of the Legislature of the State in which the Same shall be, for the Erection of Forts, Magazines, Arsenals, dock-Yards, and other needful Buildings; And  To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.

11.  Precedent: A decision that can be used as a guide for future situations involving similar facts and issues.  Expressed Powers: Powers granted to Congress specifically in Article I, Section 8 of the Constitution  Necessary and proper (elastic) clause: Allows Congress “to make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all the Powers vested by this Constitution in the Government of the United States, or in any Department of Officer thereof”  Implied Powers: Powers of Congress not stated specifically, but based on expressed powers.

12.  We admit, as all must admit, that the powers of the Government are limited, and that its limits are not to be transcended. But we think the sound construction of the Constitution must allow to the national legislature that discretion with respect to the means by which the powers it confers are to be carried into texectuion which will enable that body to perform the high duties assigned to it in the manner most beneficial to the people. Let the end be legitimate, let it be within the scope of the Constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consist with the letter and spirit of the Constitution, are Constitutional.

13.  To lay and collect taxes o To punish tax evaders o To use tax revenues to fund public schools, health, and housing programs o To require states to meet certain conditions to qualify for federal funding.  To establish naturalization laws o To regulate and limit immigration o To establish the US Border Patrol  To raise and army and navy o To draft Americans into the military o To establish military colleges o To create the US Air Force as a separate branch of military

14.  To regulate commerce (business) o To regulate banking o To establish minimum wage o To ban discrimination in workplaces and public facilities o To pass laws protecting the disabled o To regulate air travel o To build the interstate highway system  To establish post offices o To prohibit mail fraud and obstruction of the mail o To bar the shipping of certain items through the mail

15.  Lehman Brothers, Goldman Sachs, Morgan Stanley, and Merrill Lynch o Major Wall Street firms that do business in investment banking and management  TARP money o Stimulus money o Taxpayer money