Economics

Do you know your currency?

Series 1928 or 1934 $500 bill William McKinley

Series 1928 or 1934 $1,000 billGrover Cleveland

Series 1918 $5,000 billJames Madison

Series 1918 $10,000 billSalmon Chase

(Abraham Lincoln’s Secretary of Treasury ~ helped greatly during

financial mess of Civil War)

Series 1934 $100,000 billWoodrow Wilson

Macro Economics

•Robin Hood robs from the rich and gives to the poor. How does the Lorenz Curve apply to this concept?

What are interest rates?

When taking out a loan, do you want high or low rates? Why?

Monetary Policy

• Monetary Policy:– The expansion or contraction of the money

supply in order to influence the economy and the amount of spending; as set by the Federal Reserve System (FED).

The Federal Reserve System creates monetary policies to control the money supply and regulate the economy.

Monetary Policy

• If there is too much money relative to supply of goods and services prices go up and we have a period ofINFLATION

• If there is too little money relative to the supply of goods and services prices go down and we have a

RECESSION

Monetary Policy

Bernanke and the other Chairmen of the FED set policies that regulate the amount of money that is available to the consumers of America.

• Too much money is bad! Why?

• Too little money is bad! Why?

Monetary Policies

FIGHTING INFLATION:1. Take money out of circulation.

2. Let the money supply decline.

3. Overall demand decreases.

4. Prices Fall!!

Monetary Policies

FIGHTING A RECESSION:

1. Add money to circulation

2. Increase the monetary base

3. Overall demand increases

4. Prices Rise

How does the FED create/detract money

without physically printing or destroying

it????!!!!

Have out notesheet from yesterday

Warm Up:

How does a bank earn money from customers?

How do customers earn money from banks?

FED Interest Rate

Tools Used By The FED:

1. Discount Interest Rate:FED loans $ to banks at the discounted rate, the bank then loans that money out to people to help stimulate demand.

Current Rate: .25% or ¼% WHY?: If Interest Rates are cheap, people

borrow money, putting more money into the economy (and vice versa).

How the FED Operates

The FED offers a current rate of .25% or ¼%

Ben Bernanke

http://www.time.com/time/specials/packages/article/0,28804,1946375_1947251,00.html

How the FED Operates

The FED is the Bank of the U.S. and the bank of all the banks in the U.S.

Banks, like HSBC, borrow money from the FED and turn around and loan it out to people at a higher rate.

When the FED lowers its interest rate, it is a signal to people that bank rates should follow!!!

FED Interest Rate

How the FED Operates

• When loans are “cheap” people will _____________ because

• When loans are “expensive” people will __________________ because

Borrow $

Not borrow $$

FED Interest Rate

Monetary Policies

(1) If the FED increases the interest rate it is hoping to _____________ the money supply, which will fix the problem of _______________.

(2) If the FED decreases the interest rate it is hoping to ____________ the money supply, which will fix the problem of __________________.

Decrease

inflation

increase

recession

Loans are too expensive, people will slow down spending

Loans are cheap, people will be excited to spend!!

Tools Used By The FED:

2. Fractional Reserve Requirement:FED require banks to hold in reserve a fraction of all deposits; banks may loan out the rest of the deposits.

Current Rate: 10%WHY?: the more money the banks can loan

out, the more there is in circulation (and vice versa).

Monetary Policies(1) If the FED increases the reserve

requirement/Discount Rate it is hoping to _____________ the money supply, which will fix the problem of _______________.

(2) If the FED decreases the reserve requirement/Discount Rate it is hoping to ____________ the money supply, which will fix the problem of __________________.

Decreaseinflation

increaserecession

Banks must hold on more $$, less available for loans

Banks are able to loan out more money to borrowers

Monetary Policy

• It is up to Ben Bernanke to use sophisticated computer models to monitor and provide the right amount of liquidity throughout the United States.

• Liquidity: the potential to be converted to cash in a very short time (savings, stocks) NOT: property, antiques, collectables.