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Money, Banking and the Federal Reserve

Michael Giampaoli

on 12 November 2013

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Transcript of Money

3. Unit of Account
2. Divisible, liguid
1. Medium of Exchange
Money, Banking, & The Federal Reserve
2013: “Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.”
The Functions of Money
What Makes for Good Money?
1. Double Coincidence of Wants
Kinds of Money
Commodity Money always begins as a real commodity with independent (instrinsic) value.
Commodity Money could be measured or weighed; has physicality.
Paper Money that represented a commodity.
Money without intrinsic value.
Money has value due to Government decree.
The Business of Banking
Reserves: A percentage of Deposits that the bank has not loaned out.
Reserve Ratio: the fraction of deposits that banks hold as reserves
Money Multiplier
No T-Account
Money is anything that is generally accepted as means of payment.
How Money Is Measured
To Determine the Money Supply
Money Pyramid
The Monetary Base
Three Major Tools the Federal Reserve Uses to Control the Money Supply
1. Open Market Operations

The Importance of the Interest Rate
Effect on Interest Rates
Moral Hazard
"Money is whatever is generally accepted in exchange for goods and services..."
Barter is Direct Exchange & Problems with Barter
2. Indivisibilities
3. Business Calculations
Characteristics of Money
4. Store of Value
Commodity Money
Fiat Money
Transition to Fiat Money
1913: $50 Gold Certificate exchanged for 2.419 troy oz. of Gold
"Payable to the Bearer Upon Demand"
1963: "This Note Is Legal Tender For All Debts Public And Private".
Exchanged for $1 of paper money.
The practice of lowering the value of a currency.

Reducing the gold or silver content of a coin.
Effect: to increase the wealth of the one who reduces.
Increasing the Money Supply
Commodity Money
Mining, Discovery
Fiat Money
Bringing Savers (Supply) & Borrowers (Demand) Together
Channeling Savings into Investment
Banks play a Central Role in loanable funds market
Loan Banking
Deposit Banking
Demand Deposits
Fractional Reserve Banking
Money Creation: How Banks Increase the Quantity of Money
MM =
Checkable Deposits
Savings Deposits, Money Market Mutual Funds
What Counts as Money?
Liquid Assets
M1 - currency outstanding & checkable deposits
M2 - M1 plus savings deposits, money market mutual funds.
3 Components of Money Supply
The Federal Reserve System
Regulates Fractional Reserve banking system.
Bank for the U.S. Treasury.
“Lender of last Resort”
Established in 1913— “to furnish an elastic currency, to establish a more effective supervision of banking in the United States”
When Fed buys bonds, reserves increase
When Fed sells bonds, reserves decrease.
2. Discount Rate
Fed lending to banks and other institutions
3. Required Reserves
Changing the minimum RR
How the Fed Stimulates the Economy
1. Increased money supply; more loans
2. Lower interest rates, increased demand for loans.
What is it? Why is it?
What does it Do?
The Board of Governors
Seven members appointed by the President and confirmed by the Senate for 14 year terms.
The chairperson: appointed by the president from the board for 4 year term(s).
The U.S. is divided into 12 regions with a Federal Reserve bank in each.
Each is a non-profit bank with nine directors.
Presidents of the regional banks participate on the FOMC, the most important policy making body of the Fed.
Indicates Time Preference
Indicates Demand for Future Goods
Indicates Profitability of Future Goods
Solvency Crisis
The value of the bank's loans falls and it's expected the bank can no longer pay back its depositors.
Liabilities are greater than its Assets.
Liquidity Crisis
When bank has short-term liabilities that are greater than its short-term assets.
Too many depositors want their money back at the same time.
Systemic Risk & Financial Crisis 2007-2008
Term Auction Facility - auctioned reserves until interest rate was low enough so that banks would borrow.
Amount of Lending
Dec 2007 - May 2008 = $475 billion
Dec 2007 - Dec 2008 = $2 trillion
privatized profits, socialized losses
when the risks of failure are paid by others.
Full transcript