Unit 7Unit 7

Money, Banking, and Money, Banking, and Monetary PolicyMonetary Policy

AAccording to your textbook on page 492, ccording to your textbook on page 492, the ideal money should have 7 the ideal money should have 7

characteristics? What are they? And do characteristics? What are they? And do you think our “money” fulfills those 7 you think our “money” fulfills those 7

criteria? Explain!criteria? Explain!

The Ideal Money is…The Ideal Money is…

1. _____________________2. _____________________3. _____________________4. _____________________5. _____________________6. _____________________7. _____________________

• Does our “money” fulfill those 7 criteria? Explain!_______________________________________ _______________________________________ _______________________________________ _______________________________________ _______________________________________ _______________________________________ _______________________________________

The Function of BanksThe Function of Banks

Discuss with a partner:

• How do banks make a profit???? _______________________________________ _______________________________________ _______________________________________ _______________________________________

History of BankingHistory of Banking

1. 1st bankers were ___________________ where people deposited gold to vaults for a _____

2. Goldsmiths gave a __________ to a depositor and this became __________

3. Used a 100% ___________________ in the beginning, meaning __________ money was completely backed by __________

4. Then, they realized that they didn’t need to keep all the gold.

5. The Goldsmiths began __________ out some portion of the money they had (__________ __________ Loans). This is called a __________ __________ __________ .

Create a Flow Map explaining the history of banking

**You may include sub-steps below**

What is Money???What is Money???

_______________________________________ _______________________________________ _______________________________________

The 3 Functions The 3 Functions of Moneyof Money

• _____________________ : it can be used to __________ goods and services

• _____________________ : it can be used to __________ the value of different goods and services

• _____________________ : It can be __________ to buy something in the future

Tree MapTree Map

• Create a Tree Map describing the three functions of money!

• (Include term, definition, & visual)

Three Functions of $$

Why Our Money Has Why Our Money Has Value:Value:

• _____________________-- Throughout the world, $$$ are

accepted as form of money• _____________________-- $$$ accepted for money because

government says so• _____________________-- “Money doesn’t grow on trees”

Bank TerminologyBank Terminology

• _____________________ — total deposits banks have

• _____________________ — deposits bank cannot use to make a profit

• _____________________ — deposits banks can use to make a profit

• Vault Cash—cash reserves on hand-2%

THE FEDERAL RESERVE – “___________”: (The U.S. central banking system)

• Created in _____ after a series of bank failures.The Fed Board of Governors: • __ members appointed by the President, with

confirmation by the Senate• Board members serve ____ year terms• _____________ appoints the chairperson (____

_____________) to a ___ year term.____?__Regional Federal Reserve Banks: • Regional banks are located in major cities around the

country• Each bank has a president chosen by the bank’s board

of directors• The board of directors is typically drawn from the local

business and banking community

The Federal ReserveThe Federal Reserve

=_________________________________ One of the functions of the Fed is to

____________ the money supply through ____________ ____________ . Monetary policy works by encouraging or discouraging banks from making __________.

What are the two What are the two extremes of the business extremes of the business

cycle???cycle???_____________

• TOO ______ SPENDING

• The Fed needs to __________ the _________ _________

_____________

• TOO _____ SPENDING

• The Fed needs to __________ the __________ __________

Recession:Recession:Too ________ spending!!!Too ________ spending!!!

• Try to correct this problem with your partner!

• Example: – Let’s say you have only $1 in your wallet right

now. Name something you would be able to buy for a $1.

– Now, let’s say that your Money Supply (MS) went up…and now you have $5. What would you be able to buy now???

– When your supply of money increased, what happened to your total spending. Did it go up or down???

Write down how you and your partner Write down how you and your partner would correct a recession…would correct a recession…

_______________________________________ _______________________________________ _______________________________________ _______________________________________ _______________________________________ _______________________________________ ______________________________________________________________________________ _______________________________________

Inflation:Inflation:Too Too ______________ spending!!! spending!!!

• Now, think of this new economic problem when spending is too high.

• With a partner, discuss your answer for the following questions.

• If there is too much spending in the U.S. economy during a period of high inflation, what needs to happen to the Money Supply to help pull the U.S. out of a recession???

• How does decreasing the MS help us get out of a period of high inflation???

Write down how you and your Write down how you and your partner would correct inflation…partner would correct inflation…

_______________________________________ _______________________________________ _______________________________________ _______________________________________ _______________________________________ _______________________________________ ______________________________________________________________________________ _______________________________________

Monetary PolicyMonetary Policy

• Changes in the __________ __________ , intended to maintain __________ prices, __________ employment and economic __________ (3 __________ Econ Goals!)

• If the Fed is fighting unemployment and declining GDP (recession), it wants to __________ the money supply.

• If the Fed is fighting inflation, it wants to __________ the money supply.

Read ‘The Tools of The Fed’Read ‘The Tools of The Fed’

Problem: Recession

The MS needs to ____

Problem: Inflation

The MS needs to ____

Reserve Requirement

RR: ______Explain how this specific action will get the economy out of a recession.

RR: ______Explain how this specific action will get the economy out of an inflationary problem.

Discount Rate

DR: _____Explain how this specific action will get the economy out of a recession.

DR: _____Explain how this specific action will get the economy out of an inflationary problem.

Open-Market Operations OMO: _____Explain how this specific action will get the economy out of a recession.

OMO: ______Explain how this specific action will get the economy out of an inflationary problem.

After you are done reading, complete the chart below…

3 Tools of The Fed3 Tools of The Fed

• RESERVE REQUIREMENT

• DISCOUNT RATE

• OPEN MARKET OPERATIONS

3 Tools of The Fed3 Tools of The Fed

• __________ __________ – The absolute lowest % that all banks must keep of

their actual reserves

• __________ __________ – The interest rate that the Fed charges on

commercial banks – (Wells Fargo, Wa-Mu, B of A)

• __________- __________ __________– Gov’t bonds (IOUs) that can be bought and sold in

the open market

Reserve RequirementsReserve Requirements

• The reserve requirement is the minimum percent of deposits that banks must keep on reserve in their banks

• When the Fed lowers the reserve requirement, banks have _____ money to lend and the money supply ____________

• When the Fed raises the reserve requirement, banks have ________ money to lend and the money supply ___________

Discount RateDiscount Rate

• The discount rate is the interest rate that the Fed charges on loans to banks.

• When the Fed lowers the discount rate, banks are encouraged to make ______ loans and the money supply ____________.

• When the Fed raises the discount rate, banks are discouraged from making loans and the money supply ____________.

Open Market OperationsOpen Market Operations

• When the Fed buys or sells U.S. govt. bonds (IOUs) to influence the money supply

• When the Fed buys bonds, bank deposits _________, banks have _______ money to lend, and the money supply _____________

• When the Fed sells bonds, bank deposits __________, banks have ________ money to lend, and the money supply _____________.

When Fighting When Fighting Recession:Recession:

MS needs to _______ MS needs to _______• __________ Monetary

Policy Using a Money Market Graph

• To ___ the MS, the Fed can:– RR: _____– DR: _____– OMO: _____

When Fighting When Fighting Recession:Recession:

MS needs to _______ MS needs to _______• __________ Monetary

Policy Using AD and AS Analysis

• RR______• DR___ MS____

i_____ I & C ___ AE_____ AD____ PL/OE_____

• OMO_____

When Fighting When Fighting Inflation:Inflation:

MS needs to _______MS needs to _______• __________ Monetary

Policy Using a Money Market Graph

• To ___ the MS, the Fed can:– RR: _____– DR: _____– OMO: _____

When Fighting When Fighting Inflation:Inflation:

MS needs to _______MS needs to _______• __________ Monetary

Policy Using AD and AS Analysis

• RR______• DR____ MS____

i_____ I & C ___ AE_____ AD____ PL/OE_____

• OMO_____

Wrap-Up: True or Wrap-Up: True or FalseFalse

**If False, write the correct answer** For a given money demand curve, an

increase in money supply results in a decrease in interest rates.

Monetary policy is carried out by adjusting taxes and government spending.

One necessary characteristic of money is that it must be unlimited in supply.

Money is anything that is widely accepted for goods and services.

The MS needs to decrease in order to fight inflation.