CHAPTER 10

ECONOMICS, MR. VIOLANTI

Money, Banking, and the Federal Reserve System

What is Money???

A History of Money, Part ONEDeveloped through history

Barter System: Trade, many difficulties A medium of exchange was needed

What gives money value?

General acceptability, and scarcity.Money lowers transaction costs over a barter

economy.

Three Functions of Money Medium of Exchange Unit of Account Store of Value

Beginnings of Banking: Transportation of Gold, issue paper receipts. Leads to FRACTIONAL RESERVE BANKING.

The Money Supply

Money Supply (M1) consists of 3 components Currency (coins, paper money) Checking Accounts Traveler’s Checks

August, 2005: $710 Billion currency in circulation, $619 Checking Accounts, $7 traveler’s checks

Near Money: Savings accounts, non-checking bank accounts

Credit Cards are considered loansUS Dollar Symbology

US Currency

Federal Reserve System

1913, Congress passes the Federal Reserve Act Sets up Federal Reserve System, “The Fed” Central Bank, chief monetary authority

Central Bank determines: Determines Money Supply Supply economy with Federal Reserve Notes (Money) Holds Bank reserves Supervises Banks Lender of Last Resort

12 Federal Reserve District Banks

Role of Banks in Money SupplyReserve account + Vault Cash = total

reserves Required Reserve Excess Reserves

They “create” money through Checking Accounts Loans of existing deposits

Role of FED in changing Money Supply

1. Changing the Reserve Requirement RR MS RR MS

2. Open Market Operations Buy Gov. Securities MS Sell Gov. SecuritiesMS

3. Changing the Discount Rate IR MS IR MS