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1
ECON
Designed byAmy McGuire, B-books, Ltd.
McEachern 2010-2011
14
CHAPTERMoney and the Financial System
Macro
2
The Evolution of Money
LO1
Properties of the ideal money Durable Portable Divisible Uniform quality Low opportunity cost Relatively stable in value
3
LO1
Six Properties of Ideal Money
Exhibit 1
4
Coins
LO1
Coinage Amount and quality of the
metal By count
Problems Getting clipped Counterfeiting
Token money Face value > cost of coinage Seigniorage – profit from
coinage
5
Representative Money and Fiat Money
LO1
Bank notes IOUs Paper money
As good as gold Representative
money Fiat money
From the power of the state
Legal tender
6
The Value of Money
LO1
Purchasing power of money Rate of exchange for goods and
services Higher price level in economy
Smaller purchasing power Purchasing power of $ in a year
100 ÷Price index in same year Evolution over time
Steady decline since 1960
7
When Money Performs Poorly
LO1
Hyperinflation in Zimbabwe Prices grow by the hour
Not reliable store of value Exchange for stable
currency Barter
8
Financial Institutions in the U.S.
LO2
Depository institutions Commercial banks
Loans to businesses Thrift institutions
Savings banks Credit unions Loans to households
9
The Fed
LO3
1913 Federal Reserve System– Central bank– Monetary authority– 12 Federal Reserve districts
National banks– Had to join the Fed
State banks– Voluntary membership to the
Fed
10
The Twelve Federal Reserve Districts
The map shows by color the area covered by each of the 12 Federal Reserve districts. Black dots note the locations of the Federal Reserve Bank in each district. Identified with a star is the Board of Governors headquarters in Washington, D.C.
LO3Exhibit 3
11
The Fed
LO3
Powers of the Fed– Issue bank notes– Buy and sell government
securities– Extend loans to member banks– Clear checks in the banking
system– Reserve requirement for member
banks Banker’s bank
12
LO4
Board of Governors– 7 members
• Appointed by the President• Confirmed by the Senate• 14-year nonrenewable term• Insulated from political pressure• 1 chair: 4 years
– Set and implement monetary policy– Oversees the 12 reserve banks
13
LO4
Federal Open Market Committee FOMC– Open-market operations
• The Fed buys, sells government securities
– 7 board governors– 5 presidents of reserve banks– Advise the board
14
Regulating the money supply– Open-market operations– Discount rate– Reserve requirements
Deposit insurance– Federal Deposit Insurance
Corporation, FDIC• $250,000 per depositor per bank• 90% banks
LO4
15
LO4
Large number of U.S. banks– Past restrictions on bank branches
Branching restrictions– Inefficiencies– Bank failures (Great Depression)
Bank holding company– Owns several banks– Offers other services
Bank mergers– Expand geographically
16
Number of Commercial Banks Declined over the Last Two Decades, but the Number of
Branches Continues to Grow
LO4Exhibit 7
17
Largest U.S. Banks Based on Total Domestic Deposits
LO4Exhibit 8(a)
18
World’s Largest Banks Based on Total Assets
LO4Exhibit 8(b)