Notes for Week 10
Notes for Week 10 Econ 253-101
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This 3 page Class Notes was uploaded by Kayla Notetaker on Friday October 30, 2015. The Class Notes belongs to Econ 253-101 at Marshall University taught by Dr. Yuanyuan (Catherine) Chen in Fall 2015. Since its upload, it has received 13 views. For similar materials see Principles of Macroeconomics in Economcs at Marshall University.
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Date Created: 10/30/15
Macroeconomics 253 1 Chapter 14 Money Banks and the Federal Reserve System What IS Money And Why Do We Need It Money assets that people generally accept for goods and services for the payment of a debt Asset anything of value owned by a person or a firm The Barter System and the Invention of Money 0 Economies where goods and services are traded directly for other goods and services are using the barter system 0 Each person involved in an exchange must want what the other person has known as a double coincidence 0 Example Person A Person B Person C Has Apples Grapes Potatoes Wants Potatoes Potatoes Apples Both Person A and B want Apples but only Person A has the ability to barter with Person C because they both have what the other wants 0 Commodity money good used as money but also has value independent from its use as money 0 Has intrinsic independent value 0 Ex Gold and Silver Money makes exchange easier by allowing people to specialize and become more productive while pursuing comparative advantage 0 Five Functions of Money 0 Medium of Exchange when sellers are willing to accept it in exchange for a good or service 0 Unit of account in the barter system a good can have a variety of prices Money however stands for one price in terms of US dollars 0 Store of Value money can be saved and used at another time unlike produce that could be traded in a barter system that may spoil 0 Standard of deferred payment serves as a standard of deferred payment in borrowing or lending Ex buying a refrigerator you can pay a down payment not the full price and take the appliance but you must pay back the remaining amount in a certain time period What can serve as Money Suitable means of exchange The good must be 0 Acceptable usable by most people 0 Standardized quality so any two units are the same 0 Durable value is not lost by spoilage 0 Valuable relative to its weight so large enough amounts would be useful in trade and are easily transported o Divisible used in purchases of low and highpriced goods the US dollar bill meets all this criteria Fiat Money such as paper currency authorized by central bank and government body and that does not have to be exchanged by central bank for commodity money 0 Has no value except as money Macroeconomics 253 2 0 Because US dollars are fiat money the Federal Reserve is NOT required to give you silver or gold for it Federal Reserve currency is legal tender How is money measured in the US Currently the Federal Reserve uses two measures of Money Supply known as monetary aggregates o Ml the narrowest definition of money supply includes 0 Currency which is all paper and coins in circulation held by firms and households not banks 0 Value of checking account deposits in banks 0 Value of traveler s checks smallest compared to other two components 0 M2 broad definition of money 0 Money market mutual fund shares 0 Smalldenomination time deposits 0 M1 0 Savings accounts Credit and Debit cards Credit and debit cards are NOT included in the definitions of money supply In buying with credit you are taking out a loan from whatever bank issued you the credit card The full transaction is complete when you pay the credit card bill Debit cards while they take funds directly from your checking account the card itself does not represent money How the Federal Reserve Manages Money Supply Monetary Policy actions Fed Reserve takes to manage the money supply and interest rates to pursue macroeconomic objectives The Federal Reserve uses three Monetary Policy Tools 0 Open Market Operations divided into two categories 0 Open Market Purchases monetary supply increases 0 Open Market Sales monetary supply decreases 0 Discount Policy if the discount rate increases banks will be less willing to borrow Likewise if discount prices increase banks will be more willing to borrow 0 Reserve Requirements an increase in the requirement ratio leads to a decrease in money supply and a decrease in the requirement ratio leas to an increase in money supply leads into Chapter 15 Chapter 15 Monetary Policy The Fed has four main monetary policy goals 0 Price Stability rising prices erode the value of money as a medium of exchange and a store of value 0 High Employment unemployed workers and underused factories and office buildings reduce GDP below potential also causes financial distress and produces more discouraged workers Employment Act of 1946 helped promote maximum employment 0 Price Stability and High Employment are the two most important of the policy goals and are known as a dual mandate Macroeconomics 253 3 0 Stability of financial markets and institutions firms need access to funds for development production etc while savers look to invest in these firms to increase the value of their savings This provides an efficient ow of funds from savers to borrowers 0 Economic Growth specifically encourages stable economic growth allows households anf firms to engage in needed investment Demand for Money The two monetary policy targets interest rate and unemployment rate are related This relationship is explained by the money market where money supply meets money demand