Economics
Ms. Harris
Chapters 10 and 16
Money, History of
American Banking,
Banking Today, The
Federal Reserve
System & Functions,
and Monetary Policy
Chapter 10 - Key Terms/Questions,
Section 1 – Money – pp 243 - 248

Money – anything that serves as




A medium of exchange,
A unit of account, and
A store of value
Medium of exchange – anything that is used
to determine value during the exchange of
goods/services for another
Barter - Direct exchange of one
set of goods or services for
another
Unit of Account

A means for comparing the values of goods/services
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Store of Value

Something that keeps its value, even if it is
stored, rather than used
Currency

Paper bills and coins used as money
Commodity Money

Objects that have value in themselves and
that are also used as money
Representative Money

Objects that have value because the holder can
exchange them for something else of value
Fiat Money


A fiat is an order or decree
Fiat money is money that has value
because a government has decreed it
is an acceptable means to pay debts.
Why does the United States’
currency have value?

The face value of US currency is decreed by
the federal government
What are the disadvantages of
commodity money?

Disadvantages vary depending on the
commodity, but often include lack of
portability, durability, or divisibility
What is a Continental and why did
Continentals become
worthless?


Representative money (bills) issued by
Congress to finance the war against England.
The federal government could not tax the
people and the reserve held very little gold or
silver. People came to believe that they could
not exchange their Continentals for gold and
silver coins
“not worth a Continental”
What materials would you use if
you were creating a new US
l coin? Why?
The History of American Banking
- pp 250 – 256
• Key Terms/Questions, Ch 10, Sec. 2
Bank
• An institution for receiving,
keeping, and lending money
National Bank
• A bank that is chartered, or
licensed, by the national
government
Bank
Run
• Widespread panic in which
great numbers of people try to
redeem their paper money
greenback
• Paper currency issued during the
Civil War
Gold Standard
• A monetary
system of
which paper
money and
coins are equal
to the value of a
certain amount
of gold
Gold Standard - notes
• The gold standard was replaced by fiat
currency, whereby the government or central
bank is ultimately responsible for the value
of the money.
• Until 1971, the U.S. dollar was fixed to the
price of gold. Many economists feel that
reverting to the gold standard would quell
inflation because of the fixed value feature.
Federal Reserve System
• The nation’s central banking system
Central Bank
• A bank that can lend to other
banks in times of need
Member Bank
• A bank that belongs to the
Federal Reserve System
Federal Reserve Note
• The national currency used in the
United States today
Great Depression
• The severe economic decline that
marked 1929 as its beginning and
lasted more than ten years.
Federal Deposit Insurance Corporation
<http://www.fdic.gov/>
• The FDIC insures bank deposits in order to
ease the danger of depositors’ losing money,
as happened after the stock market collapse
in 1929
• Deposits at FDIC-insured institutions are
now insured up to at least $250,000 per
depositor through December 31, 2013.
What benefits came from
adoption of the gold
standard in the 1870s?
• It set a definite value for the dollar -one ounce of gold = $20
• Government was limited to printing
notes only up to the value of the
limited supply of gold
• The public gained confidence in the
banking system
Analyze the different views of Alexander
Hamilton and Thomas Jefferson concerning
the creation of a national bank
• Hamilton (Federalist) believed the
country needed a strong central
government to establish economic
and social order
• Thomas Jefferson (Antifederalist)
supported a decentralized banking
system. The States would establish
and regulate all banks within their
borders
List the three powers endowed upon
the federal government by the
National Banking acts of 1863 and
1864.
• Power to charter banks
• Power to require banks to hold
adequate gold and silver reserves to
cover their bank notes
• Power to issue a single national
currency
Bank Runs and Panics
• State-chartered banks often did not
keep enough gold and silver to back the
paper money that they issued
Wildcat Banks
• Banks located on the edges of
settled areas.
• Wildcat banks had a high rate of
failure
Fraud
• A few banks engaged in
out-and-out fraud (or
cheating). They issued
bank notes, collected gold
and silver money from
customers who bought
the notes, and then
disappeared.
• Anyone who had bought
the notes lost their money.
Many different currencies
• State-chartered banks – as well as cities, private
banks, railroads, stores, churches, and individuals
– were allowed to issue currency.
• A dollar issued by the “City of Atlanta” may not be
worth the same as a dollar issued by “City of New
York.” Many notes were counterfeit or worthless
imitations of real notes.
Ch 10, Section 3 – Banking
Today – pp 258 – 264

money supply


All of the money available in
the United States economy
Liquidity

The ability to be used
as, or directly converted
to cash
Demand Deposit
 The money in checking accounts
Money Market Mutual fund
 A fund that pools money from small
savers to purchase short-term
government and corporate
securities
.
Fractional Reserve
Banking
 A banking system that keeps only a
fraction of funds on hand and lends out
the remainder
default
 Failure to pay
back a loan
mortgage
 A specific type of loan that is used to buy
real estate
Credit card
 A card entitling its holder to buy
goods/services based on the holder’s
promise to pay for these goods and
services
interest
 The price paid for the use of borrowed
money
Principal
 The amount of money borrowed
Debit Card
 A card used to withdraw money
from an account
creditor
 Person or
institution
to whom
money is
owed
What is the difference between M1
and M2 money? Give an
example of each.
 M1 includes all money
that is immediately
accessible for people
to use. Examples:
cash, money in
checking accounts,
and traveler’s checks
What is the difference between M1 and M2
money? Give an example of each. - continued
 M2 includes all of
M1 plus all assets
that are easily
transferred into
M1. Examples:
savings account
deposits,
certificates of
deposit, and
money market
mutual funds.
How is a debit card
different from a
credit card?
 A debit card
withdraws money
directly from a
checking or savings
account
 When a credit card is
used for a purchase, it
functions as a loan
that needs to be paid
Describe the three of the
services that banks
provide.
 Storing money
safely
 Lending money
 Offering mortgages
 Issuing credit cards
What service is most
important to you in
choosing a bank ?
Why?
Economics
chapter 16

Sec. 1 – The Federal Reserve System,
pp 415-419
Board of Governors

The seven-member board that oversees
the Federal Reserve System
Monetary Policy

The actions the Federal Reserve
takes to influence the level of
real GDP and the rate of inflation
in the economy
Federal Reserve Districts

The twelve
(12)
banking
districts
created by
the Federal
Reserve Act
Federal Advisory Council (FAC)

The research
arm of the
Federal
Reserve
Federal Open Market Committee
(FOMC)

Federal Reserve committee that makes
key decisions about interest rates and
the growth of the United States money
supply
FOMC
Who serves on the Board of
Governors of the Federal
Reserve?



Seven members – usually economists
from business, academia, or government
Appointed by the President of the United
States with approval of a majority of the
Senate
A full term is fourteen years.
Economics
Chapter 16

Sec. 2 – Federal Reserve Functions
pp 420 - 423
Which is the Federal Reserve
District of Texas?
#11
Ch 16, Section 2 – Federal Reserve
Functions -- pp 420 - 423

Check Clearing – the process by which
banks record whose account gives up
money and whose account receives
money when a customer writes a check
Check Clearing -- Notes




The check as a payment method is being replaced over time
by electronic forms of payment, such as credit cards, debit
cards and online account transfers.
Nearly all the checks the Federal Reserve Banks process for
collection are now received as electronic check images.
Regardless of whether checks are cleared as paper or
electronic images, financial institutions have several
alternative ways to receive payment for, or clear, checks
deposited with them.
In line with the electronification of check processing and the
downward trend in the use of checks as a payment method,
the Federal Reserve Banks are reducing the number of their
check processing centers.
bank holding company

A company that
owns more
than one bank
federal funds rate

Interest rate banks charge each other for
loans
Discount Rate

Rate the Federal Reserve charges for
loans to commercial banks
Net Worth

Total assets minus total liabilities
List the advantages of having the
Fed oversee the regulation of the
banking system?






The Fed provides banking and fiscal
services to the federal government
Regulates the banking industry
Regulates the money supply
Provides check clearing services
Ensures stability in the banking system
Stabilizes the economy
What do bank examiners do?

Bank examiners work for the Federal
Reserve and other regulatory agencies.
They examine banks periodically to
make sure that each institution is
obeying laws and regulations
What do bank examiners do if a bank
has loans that will not be repaid?

They can force the bank to sell risky
investments or to declare loans that will
not be repaid as losses.
What factors affect the demand
for money?




Cash needed on hand
Interest rates
Price levels in the economy
General level of income
Ch 16, Sec. 3 – Monetary Policy
Tools – pp 425 - 429
 Money
Creation

The process
by which
money
enters into
circulation
RRR – Required Reserve Ratio
 Ratio
of reserves to deposits
required of banks by the
Federal Reserve
Money Multiplier Formula
 Amount
of new money that
will be created with each
demand deposit, calculated
as 1 divided by RRR
excess reserves

Reserves greater than the required amounts
Prime Rate

Rate of interest banks charge on short-term
loans to their best customers
Open Market Operations

The buying and selling of
government securities to alter the
supply of money
What happens to the money
supply when banks loan
out more money?

The money
supply
increases
Why do banks sometimes hold
excess reserves?
 These
excess reserves ensure
that banks will always be able
to meet their customers’
demands and the Fed’s reserve
requirements.
Key Terms/Questions, Ch 16,
Section 4
Monetary Policy
and Macroeconomic Stabilization
pp 430 – 434
monetarism

The belief that the money supply is the
most important factor in macroeconomic
policy
easy money policy

Monetary policy that increases the
money supply
tight money policy

Monetary policy that reduces the money
supply
inside lag

Delay in implementing monetary policy
outside lag

The time it takes for monetary policy to
have an effect
Why would the Fed enact an
easy money policy?

An easy money policy is enacted to
increase the money supply and expand
the economy
Why would the Fed enact a tight
money policy?

A tight money policy is enacted to
decrease the money supply and
contract the economy
What are inside lags, and why
do they occur?

An inside lag is a delay in implementing
monetary policy. Inside lags occur
because it takes time to determine how
the economy is performing. During the
delay, economists are gathering and
analyzing data to decide how to react
and form an economic policy
Why does monetary policy have
such long outside lags?


Outside lags may be long because they
mainly affect business investment plans.
Firms may take months or years to make
and carry out these plans.
Banking, Monetary Policy, and the
Great Depression - Page 435
1. What action did President Roosevelt take in
order to stop the banking panic in 1933?

FDR declared a bank “holiday.” All banks closed
temporarily to stop the banking panic.
What does the Federal Deposit
Insurance Corporation do?
 The FDIC insures bank deposits. If a
bank failed, the deposits would be
guaranteed by the federal government.
Why did the Federal
Reserve raise reserve
requirements in 1937?
 The Fed feared that banks
might distribute their
excess reserves to their
depositors, causing
inflation.
Were banks justified in
holding excess
reserves in the
1930s? Why, or
why not?
 The banks held the
reserves because of
the recent banking
panics.
 YES = Some think that
banks were justified to
use caution
 NO = Some say that
banks should have
anticipated the longterm effect of holding
these reserves