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Understanding Money: Its Functions, Credit, and the Federal Reserve System

This unit explores the essential roles of money as a medium of exchange, unit of account, and store of value. It delves into concepts such as barter, inflation, deflation, insurance, and credit. Learn about the structure and function of the Federal Reserve System, established in 1913 to manage monetary policy, its influence on GDP and inflation rates, and the various tools used to regulate the economy. Discover how the Federal Reserve controls money supply through interest rates and reserve requirements, and understand the importance of creditworthiness.

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Understanding Money: Its Functions, Credit, and the Federal Reserve System

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  1. Unit 8 “Money”

  2. I. Three Uses of Money • Medium of Exchange • Any object that is accepted for goods and services • Barter- w/o money, trade goods and services are traded for others

  3. Unit of Account • Means of comparing the values of goods and services • Store of Value • Money keeps its value in two forms: currency (bills and coins) and deposits (pay debts, convert to currency) • Interest- cost of borrowing money

  4. Inflation- value of money goes down, prices go up • Determined by the Consumer Price Index (CPI)- change in prices of essential goods/services • Deflation- value of money goes up, prices down

  5. II. Insurance • Insurance is essentially a bet between you and the insurance company • Costs • Premium- sum of money paid to the company for insurance • Deductible- expenses you must pay before insurer will cover expenses

  6. III. Credit • Credit- loans, credit cards, any deferred payment • Four Cs Creditors look for • Capability- ability to repay debt • Capital- income or money in the bank • Character- willingness to repay debts • Collateral- property to secure a loan

  7. Credit Cards • Form of revolving credit, borrow money on an ongoing basis • Monthly payments based on interest rates • At minimum payments, takes a long time to get out of debt

  8. First Look: Inside the Fed

  9. Unit 8“Federal Reserve System” National Geographic https://www.youtube.com/watch?v=_1NNEgmNc8k ‘Eye of the Storm’ http://www.youtube.com/watch?v=ziwut6qm7F0

  10. I. Creation of “The Fed” • Federal Reserve Act of 1913- created the Federal Reserve • After getting off gold standard, needed federal bank to respond to economy • Purpose is to lend money to other banks in time of need

  11. II. Structure of Federal Reserve System • Board of Governors • 7 directors, include Chairman (Ben Bernanke) • Twelve District Reserve Banks

  12. Regulating Money Supply • Monetary Policy- actions Fed takes to influence level of GDP (value of economic activity in the country) and rate of inflation • Reserve requirement- amount of money banks must keep in Fed banks as a reserve • Prime rate- rate of interest for short term loans (to good customers or other banks)

  13. Discount rate- cost of borrowing from the Federal Reserve • Reducing the rate- encourages banks to borrow more money so they lend more to other people • Increasing the rate- slows down economy by discouraging borrowing

  14. Fed Policies • Easy-money policy- reduces rates, lowers reserve requirement, prints currency= more money in economy • Tight-money policy- increases rates, raises reserve requirement= less money in the economy Be the Fed Chairman http://www.frbsf.org/education/activities/chairman/

  15. Other Fed Business • Automated Clearing House (ACH) -an electronic network that processes electronic debits & credits • Direct Deposits: payroll, social security & tax refunds • Direct Debits: mortgage payments, utility • The Reserve Banks & the EPN (Electronic Payment Network) edit & sort payments and deliver payments as an ‘interoperator’ between banks.

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