Activator

1International Finance 2003© Natasha Beliaeva

Activator Why do you accept money in

exchange for a good or service? What gives money its value?Represents purchasing power, acceptable form of currency, other people will accept it, etc…

Government says so, domestically and internationally accepted, represents value of goods and services


Activator – Functions of a BankFunctions

Description

Examples

A financial establishment that accepts money deposited by customers, pays it out when required, and makes loans at interest.

Saving1. Checking Account2. Savings account3. Certificates of Deposit (CDs)

Lending1. Mortgage 2. Auto3. Business4. Personal 5. Credit Cards

Wells Fargo, Bank of America, Chase, Citibank, Capital One Bank, etc.


How does a bank make money?

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Money and Banking

Money – represents value, used to buy goods and services– Something that is regularly accepted in exchange for

goods and services

Three Functions of money:1. Medium of exchange2. Unit of Account3. Store of Value


Jerry Maguirehttp://www.youtube.com/watch?v=OaiSHcHM0PA&list=PLD34B596F99A0DE3C&index=9&feature=plpp_video

http://www.youtube.com/watch?v=OaiSHcHM0PA&list=PLD34B596F99A0DE3C&index=9&feature=plpp_video

http://www.youtube.com/watch?v=OaiSHcHM0PA&list=PLD34B596F99A0DE3C&index=9&feature=plpp_video


Jail economy videohttp://www.youtube.com/watch?v=uvcMvn9azxc&list=PLD34B596F99A0DE3C&index=10&feature=plpp_video

http://www.youtube.com/watch?v=uvcMvn9azxc&list=PLD34B596F99A0DE3C&index=10&feature=plpp_video

http://www.youtube.com/watch?v=uvcMvn9azxc&list=PLD34B596F99A0DE3C&index=10&feature=plpp_video


Functions of MoneyMedium of Exchange – “spend money”; “in-between” buyers and sellers– Used to buy and sell stuff

Barter system – economy that relies on trade of one product for another– The direct exchange of products


Unit of AccountUnit of Account– a way to compare prices– Compare the values; “What is the market value?”

Fossil – $89.95 Bulova – $399.95 Rolex - $11,995


Store of Value – “save money” money holds its value if you decide to store it instead of spend it– Money holds value

Functions of Money


The Kinds of MoneyCommodity money – money that has intrinsic value– Can be used as a commodity

Intrinsic value – item would have value if not used as money– Gold, silver, cigarettes (WW2), tulip bulbs (1600’s Europe), etc– Gold standard – gold used as money; money backed by gold,

the US is not on a gold standard


The Kinds of MoneyFiat – “order/decree”; government issued money– Paper dollars– Money that has no intrinsic value


Liquidity – ease with which an asset (liquid asset) can be converted into money/medium of exchange– Liquid – checking account– Nonliquid - House

Liquidity


Money in the U.S. EconomyMoney supply – quantity of money (paper and digital) in the economy– 2012 – 9.61 Trillion

• Cash, checking accounts and savings accounts


M1 and M2M1 – money that people can gain access to easily and immediately; checkable demand deposits (balances in bank accounts)– Demand deposit - an account from which deposited funds can be

withdrawn at any time – High liquidity

M2 – consists of all the assets in M1 plus assets that are not as liquid– Slightly less liquid, savings accounts, certificate of deposits (CDS),

mutual funds, Individual Retirement Accounts (IRAs),etc.


Characteristics of Money

The six characteristics of money1. Durability2. Portability3. Divisibility4. Uniformity5. Limited in Supply6. Acceptability

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Banking


Banking


The Federal Reserve (“The Fed”) – the central bank of the U.S.Created in 1913 by Congress, Federal Reserve ActUS Central Bank – institution designed to oversee the banking system and regulate the quantity of money in the economy.Monetary policy – “money”, directly affects the nation’s money supply (expansionary or contractionary)– Dollar is officially a “Federal Reserve Note”

Chapter 16 - The Federal Reserve


Central Bank is in Washington D.C.Run by a 7 member board of governorsAppointed by the president, confirmed by the Senate to 14 year termsBoard is led by the chairmanCurrent chairman – Janet Yellen

Structure of the Federal Reserve


Fed is comprised of Twelve Federal District Reserve Banks– One Federal Reserve Bank for each district– Each bank monitors economic and banking conditions

in its district

Structure of the Federal Reserve

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http://upload.wikimedia.org/wikipedia/commons/3/3e/Federal_Reserve_Districts_Map.svg


Federal Reserve Bank Atlanta – Atlanta District


The Federal Open Market Committee

Structure and function:Meet 8 times a year to discuss the economyRun by a 7 member board of governors (in Washington D.C.) and 5 of the 12 regional bank presidents All attend, only 5 vote, President of New York Fed always votes (financial capital of the worldIncrease or decrease the $ money $ supply

Think of a dam…• A dam controls the

flow of water downriver.

• Releasing too much water would cause flooding.

• Too little water would cause a drought.

The Fed is like a dam...

• The Fed is like the dam

• Releasing too much money would cause inflation.

• Too little money would cause a recession.


Three monetary policy tools 1. Open-market operations2. Reserve requirements 3. Interest Rates

(Federal Funds Rate/Discount Rate)

The Fed’s Tools of Monetary Control


Money Supply and Lending

What would you do if your friend asked you to borrow your last $10.00?


Money Supply and Lending

Would you be more likely to lend them the money if your wallet

looked like this?

Less Money 1. Less likely to lend 2. Higher Interest Rates

to attract savers

More Money1. More likely to lend 2. Lower Interest Rates

to attract borrowers

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Saver Borrower

• Low Interest Rates • High Interest Rates

• Low Interest Rates • High Interest Rates

Auto Loan Calculator

http://www.kbb.com/car-loans-and-financing/?psid=99999&gclid=cpjz-bj74r0cfalm7aodtxuaeq&siomid=si_321863186_20064223413_1&siclientid=6239&sessguid=051f65f5-8e1d-48c2-ba81-3ea6846d9395&userguid=051f65f5-8e1d-48c2-ba81-3ea6846d9395&permguid=051f65f5-8e1d-48c

Federal Reserve Controls the Nation’s Money Supply


Government Bonds

Bond is a form of an IOU to the

government

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Banks Buy Bonds

Banks buy bonds and earn interest on them

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Open-Market OperationsExpansionary Monetary Policy

Contractionary Monetary Policy

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Open-Market Operations – the purchase and sale of bonds by the Fed on the open-market– Most often used tool of the Fed

Open-Market Operations


Increase the Money Supply– Buy bonds from the banks – credit the banks with money, increases the money

supply• Easy money policy - expansionary monetary policy• Goal is to expand the economy by lowering interest rates• Increase inflation• Encourages banks to lend money to consumers• Discourage saving• Increases the money supply



– Decrease money supply– Sell bonds to the bank, withdrawal money, decrease the money supply

• Tight money policy – contractionary monetary policy• Goal is to slow the economy by raising interest rates• Contract the economy• Cause inflation to slow (disinflation)• Discourage borrowing• Encourage saving• Restricts the money supply



Open Market Operations Explained

https://www.youtube.com/watch?v=zEP2vkK-LIk&index=37&list=PL58EB0BBFE9FC05FF





Janet Yellen

http://www.youtube.com/watch?v=QXvUVywe3bY




Reserve Requirements – regulations on the minimum amount of reserves that banks must hold against deposits– Banks must have a supply of

reserves to protect against "runs" or "panics.“

– 10% on M1 – Influences how much money

banks can create from each deposit (reserves)

– Increase in RRR, banks must hold more reserves, can loan out less

– Decrease in RRR, banks must hold less reserves, can loan out more

Reserve Requirements


Banking Simulation

Name Deposit Amount Required Reserves

Excess Reserves

1. Gillian 1950 195 1755

2. Emily 250 25 225

3. Alexxus 750 75 675

4. Dre 20 2 18

5. Leo 325 32.5 292.5

6. Stefon 250 25 225

7. Taylor 520 52 468

8. Phallan 1610 161 1449

9. Gayland 1050 105 945

10. Shelby 5060 506 4554

11,785 1178.5 10606.5


Banking Simulation

Loans

Name Loan Amount1. Chris 750

2. Shatorryia 8003. Ellie 450

4. McKenna 5005. Skye 350

6. Nacho 2007. Edie 650

8. Aaron 550

9. Daequan 100010. Hannah 200

Total 5450

Total Deposits _________

Total Reserves ___________

Excess Reserves _________

Total Loans ________

Remaining Excess Reserves

11,785

1,178.5

10606.5

5450

5156.50


Bank Runs

https://www.youtube.com/watch?v=lbwjS9iJ2Sw

http://www.youtube.com/watch?v=2EnaU7D80oM&list=PL58EB0BBFE9FC05FF&index=13







Fed Explained

http://content.time.com/time/video/player/0,32068,57544286001_1948059,00.html





Fractional-reserve system – banks hold only a fraction of deposit reserves as opposed to 100% of depositsReserve – money deposit that banks have received but not loaned out– Required and Excess

Fractional Reserve System


Required Reserve Ratio – set by the Fed, minimum amount that must be held by the bank on every deposit (required reserves)– Established by the Federal Reserve, 1/10 or 10% of M1

Excess Reserves – reserves in addition to reserve requirement set by the Fed

$1000 deposit, the bank would hold $100 in reserve and have $900 for lending

Money Creation


Money multiplier formula – is the amount of money that the banking system generates with each dollar of reservesMM = 1/RRR– 1/.10 = 10– 1/.05 = 20

Money Creation– Initial Cash Deposit (principal) x MM– The higher the RRR, the less banks

have to loan out (vice versa)– 100 x (1/10) = 1000– 100 x (1/.05) = 2000

Money Multiplier

M on ey m u lt ip lie r =1

R eq u ired rese rv e ra tio


Personal Deposit

Deposit (Money Supply)

Required Reserves (Assets)

Excess Reserves (Liabilities)

Person A

Person B

Person C

Totals

Money Multiplier

$200 $1800$2000

$1800 $180 $1620

$1620 $162 $1458

$5420 $542

• 2000 X 10 = $20,000


Fractional Reserve System Video

http://www.youtube.com/watch?v=WMTyKduYrUk&list=PL58EB0BBFE9FC05FF&index=31&feature=plpp_video




RRR and Money Multiplier Worksheet

RRR Required Reserves Excess Reserves

1%

5%

10%

15%

25%

$10

$50

$100

$150

$250

990

950

900

850

750


Personal Deposit




Person A $1,000 100 900

Person B

Person C

Person D

Person E

Totals

Money Multiplier


Personal Deposit




Person A $1,000 100 900

Person B 900 90 810

Person C

Person D

Person E

Totals

Money Multiplier


Personal Deposit




Person A $1,000 100 900

Person B 900 90 810

Person C 810 81 729

Person D

Person E

Totals

Money Multiplier


Personal Deposit




Person A $1,000 100 900

Person B 900 90 810

Person C 810 81 729

Person D 729 72.9 656.10

Person E

Totals

Money Multiplier


Personal Deposit




Person A $1,000 100 900

Person B 900 90 810

Person C 810 81 729

Person D 729 72.9 656.10

Person E 656.10 65.61 590.49

Totals

Money Multiplier


Personal Deposit




Person A $1,000 100 900

Person B 900 90 810

Person C 810 81 729

Person D 729 72.9 656.10

Person E 656.10 65.61 590.49

Totals 4095.10 409.51

Money Multiplier

3. From person A to B the money supply rose to $19004. In only 5 rounds of spending the money supply rose from $1000 to 4095.105. What would happen if the bank continued to loan excess reserves? The money could potentially grow to $10,000


RRR and Money Multiplier Worksheet

RRR Initial Deposit

Multiplier Increase in Money Supply

1%

5%

10%

15%

25%

$1000

$1000

$1000

$1000

$1000

100

20

10

6.6

4

$100,000

$20,000

$10,000

$6,666

$4,000

• 1%• Did not grow as much• Hyperinflation• Lack of growth in the economy


A $2000 deposit is made in the bank and the RRR is 12%.1. How much must be held as required reserves?2. How much will be available in excess reserves?3. How much could the initial deposit increase the money supply if

the RRR was 12%?4. How much could the initial deposit increase the money supply if

the RRR was 10%?5. How much could the initial deposit increase the money supply if

the RRR was 5%?6. Which RRR yielded the greatest amount? Explain why.

RRR and Money Multiplier Review

2000 x .12 = $240

2000 – 240 = $1760

MM = 1/.12 = 8.3

2000 x 10 = $20,000

2000 x 20 = $40,000

5%. The lower the RRR, the more they have to loan.

2000 x 8.3 = $16,666.67

MM = 1/.10 = 10

MM = 1/.05 = 20


Low interest rates – good for borrowingHigh interest rates – good for savingDiscount Rate – interest rate on loans the Fed makes to banks; currently .75%– Fed is the lender of last resort– Banks borrow from Fed when it has low

reserves; too many loans, high withdrawals– Lower discount rate encourages borrowing– Higher discount rate discourages borrowing

Federal Funds Rate – short-term interest rate that banks charge each other for loans– Currently 0 - .25%

Interest Rates

Discount Rate

Federal Funds Rate

(Federal Funds Rate)


https://www.youtube.com/watch?v=tOXpijd6t6k&index=38&list=PL58EB0BBFE9FC05FF

Interest Rates and the Fed Explained

https://www.youtube.com/watch?v=8Hq5zw4YaZQ&list=PL2EVBfEJ5a_JPvnd463lXOKmqdzL19ygR






The FederalReserve “The FED”

Board of Governors (7)Washington D.C

12 District Banks

Federal Open Market Committee (FOMC)

Monetary Policy

2. Required Reserve Ratio (RRR)

3. Interest Rates1. Open Market Operations

Buy Bonds – Increase Money SupplySell Bonds – Decrease Money Supply

Decrease RRR – Increase Money SupplyIncrease RRR – Decrease Money Supply

Decrease IR - Increase Money SupplyIncrease IR - Decrease Money Supply

Buying and selling of bonds Percentage that must be held in reserves by the bank (10%)

Discount Rate – I.R. charged by the FedFederal Funds Rate - I.R. charged from

bank to bank

Loose Monetary Policy (Easy, Expansionary) Tight Monetary Policy (Contractionary)

Loose vs. Tight Monetary Policy

Fed buys bonds from the banks

Increases money supply

Lowers interest rates

Consumers and firms will borrow more

Increased borrowing leads to increased spending

Spending raises GDP and employment

Fed sells bonds to the banks

Decreases money supply

Raises interest rates

Consumers and businesses will save more; borrow less

Decreased borrowing leads to decreased spending.

Decreased spending slows down the economy


Essential Questions

1. What is the structure of the Federal Reserve System?– 7 Board of Governors at the U.S. Central Bank in D.C.– 12 District Banks

2. What are the three tools of monetary policy used by the FED?1. Open Market Operations2. Required Reserve Ratio3. Interest Rates (Federal Funds Rate/Discount Rates)

3. What is the purpose of the FED?1. Control the money supply2. Price stability, economic growth, low unemployment


Banking


Banking


http://upload.wikimedia.org/wikipedia/commons/3/3e/Federal_Reserve_Districts_Map.svg


Federal Reserve Bank Atlanta – Atlanta District



Prequizzes

1.Prequiz-What Are Taxes? Ch. 14 Sec. 1 pgs. 359-363

2.Prequiz-Federal Taxes Ch. 14 Sec. 2 pgs. 365-369

3.Prequiz-Budget + Debt, pgs.371-373,387-390,403-405


Formulas for the Quiz

1. MM = 1/RRR1. 1/.10 = 102. 1/.05 = 20

2. Growth in the Money Supply = Deposit x multiplier1. 1000 x 10 = 10,0002. 1000 x 20 = 20,000

3. Required Reserves = deposit x RRR1. 1000 x .10 = 100

4. Excess Reserves = deposit – required reserve1. 1000 – 100 = 900


SQ3R pgs. 420 – 421 Functions of Federal Reserve

1. Serving Government2. Federal Government’s

Banker3. Government Securities

Auctions4. Issuing Currency5. Serving Banks6. Check Clearing7. Supervising Lending

Practices8. Lender of Last Resort


1. How does the Fed Serve the Government?– Serves the government’s banking needs

relative to its budget and taxation2. What makes the Fed the Federal

Government’s Banker ?– Maintains a checking account for the U.S.

treasury– Processes payments, social security

checks, IRS refunds, stimulus checks, etc. 3. How does the Fed sell Government

Securities Auctions ?– Sells, transfers, and redeems

government bonds, bills, notes, and securities for the government

4. How does the Fed issue currency?– Department of treasury prints currency,

Fed issues it– Take old money out of circulation

SQ3R


5. How does the Fed Serve the Banks?– Serves the bank through check

clearing services, safeguards bank reserves and lend reserves to banks.

6. What is the check-clearing function?– Process by which banks record who

gives up money and who receives it– Fed clears checks quickly and

accurately 7. What is their supervisory role?

– Monitors bank reserves, sends out examiners to check up on lending, rates the banks.

8. How is the Fed the lender of last resort?– In emergency situations, the Fed can

loan money to its member banks– Charge the banks a discount rate

SQ3R


The Fed Today Video Questions

1. What is a U.S. $20 bill officially?2. How many forms of currency existed

at one time during the 1800s? 3. Why did some people lose faith in

the banking? 4. What is the Fed’s primary goal?5. What can a fast/slow money supply

lead to?6. Government securities are in the

form of __________7. What is the transfer of money from

one bank to cover a check called?8. How many checks does the Fed

clear per year?


1. a. Open market operations b.

2.

3. $18,0004. 1/.20 = 55. $10000 x 5 = $50,0006. Less, because a smaller amount of each loan gets re-deposited

to be available to be loaned again.7. Less, because a smaller amount of each deposit gets loaned out

to be available to be deposited again.

Chapter 10 – Practice Worksheet


8. a. 1,000, because there is 1,000 of currency and 0 of deposits.b. 1,000, because there is now 0 of currency and 1,000 of deposits.c. 1,000 x (1/0.20) = 5,000, because 1,000 of new reserves can

support 5,000 worth of deposits.d. The total potential increase is 5,000, but 1,000 was currency

already in the system. Thus, an additional 4,000 was created by the banks.

e. 1,000 x (1/0.10) = 10,000.f. Banks can create more money from the same amount of new

reserves when reserve requirements are lower because they can lend a larger portion of each new deposit.

g. 1,000 x 1/(0.10+0.10) = 5,000.h. Yes, they are the same. With regard to deposit creation, it

doesn’t matter why banks hold reserves. It only matters how much they hold.

Chapter 10 – Practice Worksheet


Binder Check Due Today 4-27

Chapter 10 +161. SQ3R - The Functions of the

Fed 2. The Fed Webquest 3. RRR + Money Multiplier

Worksheet/Chapter 10 Practice

4. Federal Reserve to buy 600 billion in bonds, article

5. Vocab Terms 6. Daily Tens 7. Ch. 10 + 16 Study Guide 8. Ch. 10 + 16 CW Puzzle 9. Ch. 10 + 16 Notes


Include on your test

1. Name 2. Date (11-27)3. Class Period4. Test – Money and the Fed5. ID:A, B, or C


Formulas for the Test

Required Reserves = Deposit x RRR– Example = $1,000 deposit x .10 = $100

Excess Reserves = Deposit – Required Reserves– Example = $1,000 – 100 = $900

Money Multiplier = 1/RRR– Example = 1/.10 = 10

Money Creation = Principal x MM– Example = $1000 deposit x 10 = $10,000


The Six Characteristics of Money – pgs. 245-246

Characteristic Description Examples

1. Durability

2. Portability

3. Divisibility

4. Uniformity

5. Limited Supply

6. Acceptability

Must withstand physical wear and tear that is a part of being used over and over again.

Ancient Roman coins more than 2000 yrs. old. Rag/cloth content helps keep money durable (1 yr. life)

People need to be able to take money with them from place to place.

Paper money and coins are easily carried and very portable.

Money must be easily divided into smaller denominations.

Spanish doubloons, U.S. various $1, 5, 10, 20, 50, 100, denominations. Penny, Nickel, Dime, Quarter, etc.

Money must be uniform, easy to count and measure.

A U.S. dollar always buys $1 worth of goods.

The money supply must be kept in limited supply.

Pebbles on the beach (unlimited), US Federal Reserve is responsible for controlling the money supply.

Everyone in an economy must be able to exchange the objects that serve as money.

US we expect money to be accepted domestically and internationally.

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