Unit 5 – Money and Banking with the Federal Reserve System

1. Unit 5 – Money and Banking with the Federal Reserve System Text Chapters 14 and 15

2. Money and Banking Chapter 15

3. Functions of Money Medium of Exchange – able to barter or exchange for other goods Unit of Accounting – measuring tool used to compare the value of goods or services Store of Value – store purchasing power for later use

4. Characteristics of Money Durable Portable Divisible Stable in Value Scarce Accepted

5. Types of Money • Commodity Money – something that have value as a medium of exchange aside from its value as money. (ex. Cattle) • Representative Money – money that is backed by gold or silver • Gold Standard • Silver Standard

6. Types of Money cont… Fiat Money – money that has value because the government has established that it is acceptable payment for debt. Legal Tender – money that by law must be accepted as payment for public and private debt

7. History of Money • History of money is closely tied with the history of banking in the United States. • Why was it important for the United States for develop a reliable form of currency in its early years? • Standardize commerce • Help build a strong economy • Create greater equality and continuity

8. Assignment • Research the history of money in the United States from the signing of the constitution through the present. • Pg. 374 – 375 • Use additional sources as well • Write a short 1 pg reflection on how money has changed. • Make sure to include; gold standard and silver standard in your paper

9. Financial Institutions Banks Credit Unions • Banks are federally insured by the Federal Deposit Insurance Corporation. A paid Board of Directors makes all of the decisions for the bank, which are usually profit-driven and hold little benefit for the customers of the bank. Anyone, in any city or state, can open an account with a bank, and customers hold no voting privileges or decision-making power within the institution. • Credit unions, on the other hand, are designed to serve a particular group or neighborhood. People who use credit unions for their financial services are members of the credit union, rather than customers. Since credit unions are not-for-profit organizations, the profits incurred by the credit union directly benefit the members after covering overhead costs.

10. Bank Services • Checking Account • See how a check clears on pg. 395 • Savings Account • Electronic Funds Transfer • Debit and Credit Cards

11. Other non-bank financial institutions • They do not have a banking license • They are not supervised by international banking regulatory agencies • They include… • insurance firms • pawn shops • cashier's checkissuers • check cashinglocations • currency exchanges • microloan organizations (payday loans)

12. The Federal Reserve Chapter 15

13. Organization of the FED

14. Board of Governors • Directs operations of the FED • Supervises the 12 Federal Reserve Banks • 7 members chosen by the President and approved by Senate serve for 14 years. • Every 2 years a new member is chosen

15. Federal Advisory Council 12 members who are elected by the 12 district banks They meet 4 times a year and report their findings on the general business conditions of the nation.

16. Federal Open Market Committee • 12 voting members who meet 8 times a year to determine how the FED should handle the money supply • Raise or lower interest rates

17. The Banks • The nation is divided up into 12 districts, each with a single district bank. • Which district does ND belong to? Pg. 394 • 25 branch banks are also a part of the system by assisting the district banks in their duties.

18. Functions of the FED • Check Clearing- transferring of funds when you write a check • Federal government’s fiscal agent • Supervising banks • Holding reserves and setting reserve requirements • Reserve Requirement – the amount or percentage of each deposit that is kept at the bank rather than loans out to customers. • Supplying paper currency • Regulating the money supply

19. The FED regulates the money supply “The amount of money in circulation directly affects the level of interest rates, the availability of credit, and business activity in general”

20. Loose Money V. Tight Money Supply Loose money supply Tight money supply • Makes credit inexpensive and abundant • Possibly leads to inflation • Borrowing is easy • Consumers buy more • Businesses expand • More people are employed • People spend more money • Credit is expensive and in short supply • Slows the economy down • Borrowing is difficult • Businesses postpone expansion • Unemployment increases • Production is reduced

21. What is the current money policy in the United States? Which do we have right now? Can it change? What factors indicate our current financial state?

22. Expansion of Money Pg. 400 • Analyze this… • How can fractional reserve banking increase the amount of money in the economy by 500%? • Why are banks required to keep a certain percentage of the money in the bank rather than loan it all out?

23. Bank Run Videohttp://www.youtube.com/watch?v=qu2uJWSZkck

24. Bank Run Discussion Questions What caused the run on the bank in the video? Why couldn’t the people get their money out? How does the bank run video show us the expansion of money? What has the government done to protect consumers bank investments since the great depression?

25. Three ways the FED can regulate the Money Supply Changing the Reserve Requirement Changing the discount rate Open-Market Operations

26. Changing the reserve requirement • When banks increase the reserve requirement they are increasing their amount of money on reserve. This means that they will have less money to loan out and this will create less flow of money into the economy. • This is not currently being used because it is too precise of a tool

27. Changing the Discount Rate Discount rate – interest rate that the FED charges on loans to commercial banks and other depository institutions. Prime rate – rate of interest that banks charge on loans to their best customers.

28. Open-Market Operations • Open-market – is not controlled by government but is open to private business. • Open-Market Operations – the buying and selling of government securities by the FED to affect the money supply. • When the FED buys securities it is making a deposit in a dealer bank…increasing its reserve and allowing it to loan out more money. Increasing the money supply. • When the FED sells securities it is taking money from dealer banks…decreasing its reserve and slowing the loaning of money. Decreasing the money supply.

29. Criticism of the FED • Some say the FED has worsened both recession and inflation by engaging in monetary policy. • Other suggest that the FED should not engage in monetary policy, but allow the economy to fix itself. • They should increase the money supply by a certain percentage every year.