unit 6: federal reserve system and monetary policy
TRANSCRIPT
2. Commodity money system
• An item with intrinsic value is used as money
Examples:
Cigarettes used in prison
Animal furs used in colonial times
3. Representative Money System
Money “backed” by somethingExample: The Gold standard; people didn’t
carry around the gold, they had a gold certificate that represented the gold
*4. Fiat money system
• Money that is declared so by the government
• It is not “backed” by anything
Jobs of the FED
• Print money
• Clear checks
• Supervise banks
• Act as a bank to banks
• Manage money supply
Member Banks
FDIC insured (Federal Deposit Insurance
Corporation)
Insures money in banks up to $250,000
Fractional Reserve Banking
If you have a bank account, where is your money?
Only a small percent of your money is in the safe. The rest of your money has been loaned
out.
This is called “Fractional Reserve Banking”
The FED sets the amount that banks must hold
23
Demand DEPOSIT
• Money placed in banks by customers
• Banks take these deposits and loan them out to people who want to borrow money
Practice:
• If a $100 deposit is placed in a bank and the reserve requirement is 20%, how much money does the bank have to hold?
• How much can they loan out?
Practice
• If $50 is deposited into a bank and the reserve requirement is $10%, how much is the bank required to hold?
• How much can they loan out?
• If $10 is deposited into a bank and the reserve requirement is 10%, how much money must the bank hold?
• How much money can they loan out?
The process of how banks “create” money
Banks only influence the amount of $ in the economy if they make loans.
When a loan is taken out, it is spent and ends back up in the bankingSystem
Example: complete the chart assuming the reserve requirement is 10% Bank Deposit Reserve
requirement Loan
A $1000 $100 $900
B
C
The process of how banks “create” money
Bank Deposit Reserve requirement
Loan
A $1000 $100 $900.00
B $900 $90 $810.00
C $810 $81.10 $728.90
MoneyMultiplier Reserve Requirement (ratio)
1=
The Money Multiplier
33
• Used to determine how much a loan can impact the overall economy
Maximum change in the money supply =
Money multiplier X Deposit = total - deposit
Example: Billy deposits $400 in his bank and the
reserve requirement is 10%.
What is the money multiplier?
What is the maximum change in the money
supply?
THE MULTIPLE EXPANSION of money will be less if:
• 1. Banks DO NOT loan out all of their excess • 2. People DO NOT spend all the money that they
borrow • 3. When money is spent, it is NOT placed back
into a bank
Practice:
1. $50 is deposited into a bank and the reserve requirement is 10%. What is the total expansion of the money supply
Money multiplier = ?
Money multiplier X deposit (-deposit) = ?
2. $20 is place as a deposit into a bank and the reserve requirement is 25%. What is the total expansion of the money supply?
Money multiplier = ?
Money multiplier X deposit (-deposit) =?
• 3. $100 is deposited into a bank and the reserve requirement is 5%, what is the multiple expansion of money?
Money multiplier = ?
Money multiplier X deposit (-deposit) = ?
Topic 4: Monetary Policy
• What the FED does to regulate the money supply
• The FED controls the money supply by adjusting Nominal interest rates
Expansionary monetary policy
Implemented during Recession
Goal is to speed up the economy; they want people to get out and spend $ in economy
Contractionary Monetary Policy
• Implemented during INFLATION
• Goal = slow down the economy; want less spending to occur in the economy
Tools of monetary policyThe FED adjusts the money supply by
changing any one of the following:
1.Change the reserve requirement
2. Changing the Discount rate Discount Rate- Interest rate the FED
charges banks to borrow money
**3. Open Market Operations•Buying and selling Bonds (securities)
How can the Fed speed up the economy?
• 1. BUY BONDS using open market operations (BUY = BIG)
• 2. LOWER the reserve requirement
• 3. LOWER the discount rate of interest
Impact of expansionary monetary policy
1. Banks have more money to lend
2. Interest rates go down
3. People borrow more money due to low interest rates
4. People save less money due to low interest rates
5. People spend more money
How can the Fed slow down the economy???
• 1. SELL BONDS using open market operations (SELL = SMALL)
• 2. RAISE the reserve requirement
• 3. RAISE the discount rate of interest