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Chapters 17 and 18

by: Rachel Moore

Chapters 17 and 18 ECON 2105

Rachel Moore
GPA 3.33

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These notes cover Chapter 17 and the first part of Chapter 18 which was discussed in class April 15th - April 22nd. If you purchase these notes, send me an email and I can send you the rest of Chap...
Class Notes
ECON2105, McWhite, chapter17, Chapter18, uga, Macroeconomics
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This 7 page Class Notes was uploaded by Rachel Moore on Friday April 22, 2016. The Class Notes belongs to ECON 2105 at University of Georgia taught by McWhite in Summer 2015. Since its upload, it has received 101 views. For similar materials see Macroeconomics in Economcs at University of Georgia.


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Date Created: 04/22/16
ECON 2105 April 15, 2016 – April 22, 2016 Chapter 17 Money is an asset generally accepted as payment for goods and services or repayment of debt. Before money, people bartered (traded goods directly). This is inefficient because it requires two people to want something, meet up, and then decide on a price. Medium of Exchange: promotes economic efficiency by minimizing the time spent in exchanging goods and services; must be easily standardized, *widely accepted*, divisible, easy to carry, and not deteriorate quickly. Unit of Account: used to measure value in the economy, a standard measure that is easily understood by those in an economy. Example: If I have a goat and want to sell it for $200, most understand that. If I have a goat and want to sell it for 4 hammers and 6 chickens, that takes a little more effort. Store of Value: used to save purchasing power; most liquid of all assets but loses value during inflation. Getting paid in cash vs. Chick-fil-A sandwiches: you can put the money in your wallet and use it in two weeks; cumbersome and not helpful in two weeks. Cigarettes were used as money during WWII. Soldiers were given rations and trade became difficult; over time the value of goods could be determined in a number of cigarettes. Types of Money • Commodity Money o Oldest form o Precious metal and other valuable commodities o Gold, silver, diamonds, etc. o Too heavy and inconvenient • Fiat Money o Paper Money initially backed by ability to convert to coins or other metals o Backed by government guarantee o Example: U.S. money U.S. used to have a “Gold Standard” ▯ you could trade dollars for gold or silver; went away with Nixon. Created By: Rachel Moore Not for redistribution. U.S. Dollars are printed at the Treasury at the Bureau of Engraving and Printing. They are actually called Federal Reserve Notes. It costs about 4.2 cents to produce a dollar bill. Dollar bills are made of 25% linen and 75% cotton, not paper. U.S. Money Supply: • M1 = Cash and Checkable Deposits (most liquid) • M2 = M1 + Savings, Short-term CDs (certificate of deposit), Money Market Accounts (anything that takes a little time to get to) • M2 is the base number when looking at the Money Supply. Created By: Rachel Moore Not for redistribution. The Federal Reserve System • Resistance to establishment of a central bank o Fear of centralized power o Distrust of moneyed interests (fear of large banks and corporations manipulating economy) • 1870 – 1907: U.S. had 21 financial panics o Crop failure ▯ loan default o Loan default damaged rural bank o Rural bank withdrew deposits from city bank o Financial difficulties spread o Bank “runs” • No lender of last report • Federal Reserve Act of 1913 **DECEMBER 23, 1913 – FED CREATED** • Structure o Board of Governors (7) ▯ Chairman of the Board of Gov: Janet Yellen ▯ Appointed by president; approved by the Senate ▯ Currently only have 5 people on BOG because no one has been approved for 2 open spots due to Senate approval. o Federal Reserve Banks (12) ▯ 9 directors who appoint Federal Reserve Bank President ▯ Semi-private institution • The Board of Governors o 14 year term (non-renewable) because long-term changes need to be seen. Created By: Rachel Moore Not for redistribution. o What do they do? ▯ Oversee the banking and monetary system ▯ Regulate banks ▯ Approve bank mergers ▯ Sets reserve requirements ▯ Sets discount rate ▯ Votes in open market operations • Monetary Policy Operations take place in the New York Federal Reserve Bank only. • The Gold Vault is located in the New York Federal Reserve Bank. Contains 250 million ounces of gold (over $85 billion at current market prices). 10% of all the gold that has ever been taken out of the ground. • Federal Open Market Committee (FOMC) o They meet to determine the (f.f.) federal funds target rate. o 12 members: 7 board of governors and 5 federal reserve bank presidents (rotate from 12 districts) o New York Federal Reserve Bank President ALWAYS on the FOMC because it takes place in the New York bank. o Use “open market operations” as the main method to affect the money supply in the economy. o Open Market Operations: the buying and selling of government bonds to increase/decrease the available funds in the economy; affects bank reserves. ▯ Sell bonds ▯ decreases the funds/reserves in the economy ▯ Buys bonds ▯ increases the funds/reserves in the economy • The FED is in charge of the money supply in the U.S.; this is referred to as Monetary Policy. Chapter 18 Money Supply • Reserves: % of demand deposits banks are required to hold; assume 10%. • Excess Reserves = Total Reserves – Required Reserves • Bank holds reserves in their “account” at the Federal Reserve Banks o The FED pays interest on reserves held at the Fed Banks (like your bank does for your savings account) Created By: Rachel Moore Not for redistribution. • Fractional-reserve banking: the practice whereby a bank accepts deposits, makes loans or investments, and holds reserves that are a fraction of its deposit liabilities; the smaller the reserve requirement, the greater the multiplier effect (1/R) • Banks can also borrow directly from the FED at the discount rate. Banks borrow from each other at the federal funds rate. The Federal Funds Rate is a market rate, but the FED influences it. As both rates rise, borrowing becomes more expensive. Created By: Rachel Moore Not for redistribution. Federal Reserve and 2008 • Started buying assets other than short term treasuries • Bought “Mortgage Backed Securities” • Federal Funds rate was “functionally zero” so the FED adjusted. When Banks Go Under Although the graph looks worse in the 1980s, the Great Depression peak was still much worse because there were very few institutions. The percentage of institutions is not shown, just the actual number. Created By: Rachel Moore Not for redistribution. FDIC – Federal Deposit Insurance Corporation Created By: Rachel Moore Not for redistribution.


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