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Published byRachel Lang Modified over 8 years ago
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Money and Banking The Federal Reserve and Monetary Policy
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Characteristics of Money 1. Recognizable 2. Durable 3. Portable 4. Divisible 5. Utility 6. Value (Scarcity)
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Functions of Money 1. Medium of Exchange 2. Standard of Value (comparing worth) 3. Storehouse of Value (saving)
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The Federal Reserve The Federal Reserve Act of 1913 created the Federal Reserve System.
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Functions of the Fed 1. Supervises and regulates financial institutions 2. Issues coin and currency 3. Provides financial services to banks and the government. 4. Monetary Policy
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How does the banking system “create” money? The Money Supply is limited by: 1. Federal Reserve Requirement 2. Banks limit loans 3. People don’t save money 4. Depositors withdraw their money.
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Categories of money M-1 – money supply componets conforming to money’s role as a medium of exchange; coins, currency, checks and other demand deposits, traveler’s checks M-2 – money supply components conforming to money’s role as a store of value; M1, savings deposits, time deposits.
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Tools of Monetary Policy Reserve Requirement – formula used to compute the amount of a depository institution’s required reserves. Open Market Operations – monetary policy in the form of U.S. treasury bills or bond sales and purchases, or both. Discount Rate – interest rate that the Federal Reserve System charges on loans to the nation’s financial institutions.
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Expansionary Monetary Policy Lower interest rates Lower the reserve requirement Buy government securities
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Contractionary Monetary Policy Raise interest rates Raise the reserve requirement Sell government securities
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