Chapter 11 – 12
Monetary Policy
Chapter 11 Section 1
Chapter 12 Sections 1,2, 3
Chapter 11
Section 1
I.

Explain the three
functions of money.
A. Barter Economy –
• Moneyless economy that relies on
trade.

B. Money –
• Any substance that functions as a
medium of exchange, a measure of
value, and a store of value.
3
I.

Explain the three
functions of money.
C. Three functions of money
• 1)
Medium of exchange
• Generally accepted as payment for
goods and services.
• 2) Measure of value
• Expression of worth.
• 3) Store of value
• Goods or services can be converted
into money, which is easily stored until
some future time.
4
II. Identify four major types of
money used in early societies.

A. Commodity Money –
• Money that has an alternative use as a
commodity (i.e. corn, gunpowder, tobacco).

B. Wampum –
• Conch and mussel shells used as money by
the Narraganset Native Americans.
5
II. Identify four major types of
money used in early societies.

C. Paper Currency –

D. Specie –
• Fiat
• Money by government decree.
• Money in the form of coins.
6
III. Trace the origins of the United
States dollar.

A. Pesos –
• Spanish
• Bullion
• Ingots or bars of precious metals

B. Talers –
• Austrian taler
• Monetary unit – standard unit of currency
7
IV. Describe the four
characteristics of money.

A. Portability –

B. Durability –
• Transferred from one person to another.
• Able to last a long time.
8
IV. Describe the four
characteristics of money.

C. Divisibility –

D. Limited Availability–
• Easily divisible into smaller units.
• Money loses its value when there is too
much of it.
9
The Circular Flow Model of a
Market System
Costs
Factors of production
Resource Market
Income-wages, rents,
interest, profit
Resources-land, labor,
capital, entrepreneurship
Taxes
Taxes
Government
Business
Households
Loans
Banking
Transfer payments
Firms
Savings
System
Loans
Retained profits
Subsidies
Goods and services
Revenues
Product
Market
Goods and services
Consumption expenditures
END
CHAPTER 11
Chapter 12
Section 1
I.



Identify the unique
features of the FED.
A. 12 Districts – Atlanta, GA 6
B. Operate independently of one
another.
C. Private ownership
• 1)
Member banks – banks that belong
to the Federal Reserve System.
• 2) The FED is owned by member banks.
13
14
II. Describe the structure of the
Federal Reserve System.


A. Board of Governors –
• 1)
• 2)
7 members appointed by President.
Regulatory and supervisory agency.
B. Federal Open Market Committee –
• Makes decisions about the money supply
and interest rates.

C. Federal Advisory Council –
• Provides feedback on the overall health of
the economy.
15
Banking Structure
Figure 15.1
III. Explain the major regulatory
responsibilities of the FED.

A. State Member Bank Supervision –
• 1)
• 2)

All depository institutions must maintain
reserves.
The FED is responsible for state
chartered member banks.
B. Holding Companies –
• 1)
• 2)
Corporation that owns one or more banks.
Formed to avoid government regulations.
17
III. Explain the major regulatory
responsibilities of the FED.


C. International Operations–
• 1)
The FED has broad authority to supervise
and regulate foreign banks operating in the
United States.
D. Mergers –
• 1)
The FED must approve a merger of two or
more banks.
18
III. Explain the major regulatory
responsibilities of the FED.


E. Check Clearing –
• 1)
Reserves are shifted from one bank to
another.
F. Consumer Legislation–
• 1)
• 2)
Truth-in lending laws require sellers to
disclose info to people who buy on credit.
Regulation Z is a provision that requires
truth-in lending disclosures.
19
III. Explain the major regulatory
responsibilities of the FED.

G. Currency –
• 1)
• 2)

Paper component is printed at the Bureau
of Engraving and Printing.
Metallic coins are coined at the U.S. Mint.
H. Margin Requirement –
• 1)
Minimum deposits left with a stockbroker to
be used as down payments to buy other
securities.
20
21
Loose Money Policy

Expands the Money Supply
• Lower discount rate
• Lower reserve requirements
• Buy government securities
Tight Money Supply

Contracts the Money Supply
• Raise the discount rate
• Raise the reserve requirement
• Sell government securities
Money Supply

M1 - The Transactions Approach
• Currency - federal reserve notes and coins
• Demand Deposits - checking accounts, NOW
•
•
•
accounts, SuperNOW accounts, share drafts,
ATM, debit cards
Unused credit card balances
Some traveler’s checks
Food stamps
Money Supply

M2 - The Liquidity Approach
• M1
• Savings Accounts
• Short Term Time Deposits
• CDs
• MMDAs
• REPOs
• Eurodollars
• MMMFs
The Money Supply

M3

L
• M2
• Large time deposits - CDs $100,000+
• Large money funds
• M3
• Savings bonds
• Short-term treasury securities
• commercial paper
• banker’s acceptances