Chapter 24Money and the Federal Reserve System • Key Concepts • Summary • Practice Quiz • Internet Exercises ©2000 South-Western College Publishing
In this chapter, you will learn to solve these economic puzzles: Why do nations use money? What does the Federal Reserve bank do? Is “plastic money” really money?
What is Barter? The direct exchange of one good for another good, rather than for money
What is the problem with Barter? It requires a coincidence of wants
What is Money? Anything that serves as a medium of exchange, unit of account, and store of value
What is the Advantage of Money? The use of money simplifies and therefore increases market transactions
What are the Functions of Money? • Medium of exchange • Unit of account • Store of value
What is aMedium of Exchange? The primary function of money to be widely accepted in exchange for goods and services
What is aUnit of Account? The function of money to provide a common measurement of the relative value of goods and services
What does it mean that Money is Liquid? It is available to spend in exchange for goods and services without any additional expense
Are Credit Cards Money? No, credit cards fail to meet the store-of-value criterion and are therefore not money
What is the best level of Scarcity for Money ? The supply of money must be great enough to meet ordinary transactions needs, but not be so plentiful that it becomes worthless
What are other Properties of Money? Money must be … • portable • divisible • uniform • acceptable
What isCommodity Money? Anything that serves as money while having market value in other uses
Is our Money backed up by Gold or Silver? No, our paper money was exchangeable for gold until 1934, and in 1963 Congress removed the right to exchange $1 bills for silver
What is Fiat Money? Money accepted by law and not because of redeemability or intrinsic value
What makes our Dollar Bills Fiat Money? All our bills claim that “This note is legal tender for all debts public and private”
What doesLegal Tender mean? Legally dollar bills cannot be refused as payment for a debt
What is Currency? Money, including coins and paper money
What areCheckable Deposits? The total of checking account balances in financial institutions convertible to currency “on demand” by writing a check without advance notice
What is M1? The narrowest definition of the money supply. It includes currency, traveler’s checks, and checkable deposits
What is M2? The definition of the money supply that equals M1 plus near monies, such as savings deposits and small time deposits of less than $100,000
What is M3? The definition of the money supply that equals M2 plus large time deposits of $100,000 or more
What distinguishes M1 from M2 and M3? M1 is more liquid than M2 or M3
What is the Federal Reserve System? The 12 central banks that service banks and other financial institutions within each of the Federal Reserve districts
What is the Board of Governors of the Fed? The seven members appointed by the President and confirmed by the U.S. Senate
How long does a Board Member serve? They serve for a non-renewable fourteen-year term
What is the responsibility of the Board? To supervise and control the money supply and the banking system of the U.S.
What is the Chairman of the Board of Governors? The President designates one member of the Board to serve as chair for a renewable four-year term
Who is Alan Greenspan? Chairman of the Board of Governors of the Fed
What is the Federal Open Market Committee? The FOMC is the Fed’s committee that directs the buying and selling of U.S. government securities
What is the purpose of the FOMC? To increase the money supply if we have unemployment and decrease it if we have inflation
What is the Federal Advisory Council? 12 prominent commercial bankers who council board members but who do not have voting rights
How many Commercial Banks are members of the Fed? About 6,000 of the 15,000
The Fed’s Organization Board of Governors Regional Fed Banks U.S. Banking System
What does a Federal Reserve Bank do? • Controls the money supply • Clears checks • Supervises and regulates banks • Maintains and circulates currency • Protects consumers • Maintains federal government checking accounts and gold
What is the Federal Deposit Insurance Corporation? The FDIC is a government agency established in 1933 to insure commercial bank deposits up to a specified limit
What is theMonetary Control Act? A 1980 law that gave the Fed greater control of nonmember banks and makes all financial institutions more competitive
Key Concepts • What is Barter? • What is Money? • What are the Functions of Money? • What does it mean that Money is Liquid? • What are other Properties of Money? • What is Commodity Money? • Is our Money backed up by Gold or Silver?
Key Concepts cont. • What is Fiat Money? • What is Currency? • What is M1? • What is M2? • What is M3? • What is the Federal Reserve System? • What is the Board of Governors?
Key Concepts cont. • What is the Chairman of the Board of Governors? • What is the Federal Open Market Committee? • What is the Federal Advisory Council? • What does a Federal Reserve Bank do? • What is the Federal Deposit Insurance Corporation (FDIC)?
Money can be anything that meets these three tests. Money must serve as (1) a medium of exchange, (2) a unit of account, and (3) a store of value. Money facilitates more efficient exchange than barter. Other desirable properties of money include scarcity, portability, divisibility, and uniformity.
Medium of exchange is the most important function of money. This means that money is widely accepted in payment for goods and services.
Unit of account is another important function of money. Money is used to measure relative values by serving as a common yardstick for valuing goods and services.