functions of money a medium of exchange: people are willing to accept in exchange for goods and...

Functions of Money

• A medium of exchange: people are willing to accept in exchange for goods and services

• A standard of value: a measure of value that allows people to compare the values of goods and services using prices

• Store of value: allows people to save for future consumption

©2012, TESCCC

Properties of Money

• Durable: it lasts even after years of use• Portability: you can take it anywhere• Divisibility: must be easily divided into smaller

denominations• Uniformity: money must be the same within a

country• Limited Supply: if there is too much in circulation,

the value drops and may even become worthless• Acceptability: people may use it to buy other things

©2012, TESCCC

Characteristics of Money

• Commodity Money: items that have value in themselves other than being used as a monetary unit (gold, tobacco, salt…)

Characteristics of Money

• Representative Money: items that have no value in themselves but can be exchanged for something of value (gold certificates, silver certificates, checks…)

Characteristics of Money

• Fiat Money: Money that has value simply because the government has decreed it to be an acceptable means to pay debts (Federal Reserve Notes)

©2012, TESCCC

*Pros *Cons• use what you

have

• don’t go into debt

• good for emergencies, can build credit, can replace if lost

• can’t go into debt, can replace if lost

• difficult to set up rates, doesn’t last

• if it’s lost it’s gone

• can go into debt, can replace if lost

• Must have that money in your account

Bartering

Currency

Credit Cards

Debit Cards

Financial Institutions

Includes Banks, Credit Unions, Savings and Loans

What do they do for consumers?• Intermediaries between savers• and borrowers• Convenient and safe place to store money• Provide commercial and personal loans and

mortgages

TYPES OF ACCOUNTS at Financial Institutions

INSURED BY FICA• Checking – easy to liquidate, safe• Savings – easy to liquidate, low risk, earn interest• Money Market – higher interest rate than savings,

low risk(liquidity – easy to get to your money)• Mutual Funds, Stocks & other investments are

NOT insured but the return on your investment is higher.

The 12 banks are instruments of the government but not owned by the government. The over 5,000 banks in the 12 districts buy stock ($1 per share) in their district bank (& get 6% dividends [no capital gains]) so the banks are privately owned. Serving the public, it is owned by citizens.The 12 banks are a corporation owned by the banks in their districts, but a public (G) agency directly responsible to Congress.They might make $30 billion in one year and turn 90% of that over to the Treasury.

THE FEDERAL RESERVE Fed

Four Part Structure of the Fed Seven Board of Governors most important body of the Fed appointed by the President and confirmed by the Senate 14-year terms are staggered (one replaced each two years) [they are paid $162,100] isolation from political pressure (only one 14 year term)

the Chairman serves only four years but can be reappointed [4-year renewable term] 4 times His pay is $180,100. Every president gets to appoint at least two. Clinton appointed 8 & Bush appointed 4 in 1st 2 years.

One term begins every 2 years on Feb. 1 of even numbered years.

2. Federal Open Market Committee [FOMC]-Fed’s main policy-making arm

-includes 7 Board of Governors, NY Fed President [who is vice chairman, and is the second most important in the system

The 4 other bank presidents rotate among the other 11 every 3 years.

-other 7 bank presidents are non-voting members

-they meet every six weeks

Monetary Policy

• Federal Reserve policy of regulating the availability of money and credit in the economy to deal with economic

instability.

© 2010, TESCCC

Major Tools of the Fed1. Reserve Requirement- the percentage

of total deposits that the Fed requires banks to hold back and not loan out

2. Discount Rate- Interest rate the Fed charges member banks

3. Open Market Operations-FOMC or Federal Open Market Committee buys and sells government bonds and securities.

© 2010, TESCCC

Easy Money Policy

• Recession phase of business cycle• Unemployment is the problem• Goal is to increase the money supply• Fed’s Major Tools

1.Reserve Requirement- Decrease reserve requirement. More money available for banks to loan out. More loans will create more money in the economy.

© 2010, TESCCC

2. Discount Rate – Decrease discount rate. Makes it cheaper for banks to get a loan from the Fed, so banks will charge lower interest rate to you. This makes getting a loan more attractive so more people will get loans.

3. Open market – The Fed will buy on the open market. The Fed will purchase government securities with money. This is money that had not been out in the economy so this will increase the money available in the economy.

© 2010, TESCCC

Tight Money Policy• Expansion phase of business cycle• Inflation is the problem• Goal is to decrease the money supply

1. Raise Reserve Requirement- This will cause banks to have less money available for loans. Less loans will mean that less money is created in the economy so this will decrease the money supply.

© 2010, TESCCC

2. Raise Discount Rate- This will make it more expensive for a bank to get a loan from the Fed so banks will increase the interest rates that they charge individuals. Higher interest rates will make getting a loan less attractive so fewer people will get loans.

3. Sell on open market- FOMC will sell government securities on the open market. The Fed takes this money and locks it up in the vault at the Fed so this decreases the available money in the economy.

© 2010, TESCCC

Sample Questions

*Liquidity*low risk*low return*lawfully insured*Safe place to store money

1. The above characteristics would describe all EXCEPT:

A. Mutual FundsB. Savings accountC. Money Market

• Convenient and safe place to store money• Intermediaries between savers and borrowers• Provide commercial and personal loans

and mortgages

2. What is the best category for the list above?

A. Functions of Government Agencies

B. Functions of Scientific Institutions

C. Functions of Financial Institutions

D. Functions of Not­f or Profit Agencies

3. Fiat money- _______A. Money that isn’t

valuable but represents something that is

B. Money that has value because the government says it does

C. A form of money that has value in it’s own right (intrinsic value)

4. Which method of payment allows people to spend more than they have and create debt?A. BarteringB. CurrencyC. Credit CardsD. Debit Cards

5. Which method above are limited to what you have in the bank?

6. Our nation’s central bank is the Federal Reserve. It is owned by the _____ banks and is governed by the 7 members of the ______.

A. member, FOMCB. member, Board of

governorsC. Government, Bank

committee of congressD. Government,

Presidential cabinet

7. The __________ appoints the members of the Federal Reserve and the chairperson. The appointments must be approved by ______.

A. President, CongressB. President, SenateC. Senate, PresidentD. FOMC, Senate

8. Tools used to implement Monetary Policy include all of the following EXCEPT:

A. Open marketB. CongressC. Reserve RequirementD. Discount Rate

9. Nationally chartered banks, appointed by President, 12 districts, 14 year terms; this describes the ________.A. Banking systemB. Monetary PolicyC. Stock ExchangeD. Federal Reserve

10. The unemployment rate has risen to 9.1%. GDP has dropped for the second quarter in a row Which phase of the business cycle is being described, and what tool would the Federal Reserve Board of Governors most likely suggest to be used? A expansion ... easy money policy

B recession ... lower the discount rate C expansion ... lower the reserve requirement D recession ... tight money policy

11. More money is required to be kept in bank reserves and less is available to be loaned out to businesses to invest in the economy. What is the Federal Reserve doing in the above example.

A Decreasing the Reserve Requirement B Increasing the Reserve Requirement C Selling Bonds D Decreasing interest rates.

12 Interest Rates are lowered to _________ the money supply. This is an example of _____ Money Policy.

A decrease…………TightB decrease………….EasyC increase ……… TightD increase…………Easy

ANSWERS

• Make sure you answer the questions BEFORE looking at the answers. STUDY what you missed.

1. A 2. C 3. B 4. C 5. D6. B 7. B 8. B 9. D 10. B11. B 12. D