Toss three coins What is the probability of getting 2 heads and 1 tail when you toss three coins? Give appropriate evidence to support your answer.
American Economy: T opic 4 What is money o Physically money can be anything o Physical money – over the years has been physically composed of every thing one can think of Medium of exchange – means must be readily accepted as a trade for a good or service Store of value – means money must be able to be sored and spent later Measure of value – means money must be able to distinguish between value of goods MI – the strictest definition of the money supply o Paper money – 19% o Coins – 1% o Demand deposits – 80% Nothing backs your money but confidence in the government that a dollar is worth a dollar Fiat money – term used to describe the fact that confidence in the government backs money Types of money – coins, paper money, and demand deposits Near monies – savings accounts, bonds, loans, and stocks During an inflation we encourage the transfer of monies to near money so people will not spend During a deflation we encourage the transfer of near monies to money so people will spend Structure pf the fed: o Board of governors Open market operations committee – buys and sells bonds increasing and decreasing the interest rate 12 regional federal reserve banks Individual national banks and selected state banks Non member or affiliated banks General council committee – recommends new laws on financing to congress o The federal reserve board of governors directs the twelve regional banks owned by the corporation to increase or decrease the money supply Functions of the federal reserve system o It’s the banker’s bank o It’s the government’s bank o It performs surprise audits of banks o It provides paper money to its economy o It provides for the collection of checks Reserve ratio – is determined by the federal reserve bank and is the minimum percent of the reserves that must be kept in the federal reserve bank to cover checks that are clearing the system from an individual bank, this is a percent of that bank’s demand deposits Excess reserves – are the amount of cash and reserves remaining after required reserves held by the federal reserve bank have been considered The multiplier – the money for the load, stock purchase, bong purchase, etc. is given to the individual as a check and the check is assumed to be deposited in another bank. This increase that bank’s reserves and it can load out 80% of the deposited amount, it must keep 20% as the required reserves o This process will continue and a multiple of the original increase in the money supply is crease since each time the money is deposited in anther bank excess reserves are created in that bank and the bank will load it out, or buy bonds or stock with it Monetary policy 2 o Quantitative monetary policy – changing the discount rate, reserve ratio, or buying and selling bonds o Lowering the reserve ration allows the bank to keep less reserves at the Fed and increases the banks excess reserves it can create money with. This would be done in a deflation. For and inflation just the opposite would occur: If the Fed buys bonds it is trading near money for money, which would happen in a deflation, the opposite would happen in an inflation o Qualitative monetary policy – changing selective credit controls (credit card rates), moral suasion (jaw boning), and changing the margin The Fed can change the interest rate on certain parts of the economy. For example, it can change the rate we pay on credit cards The fed can change the amount required to buy a commodity contract or stock. It can require the banks to get more money up front and loan out less (increase the margin) in an inflation making it more difficult to trade in inflationary period. A deflation would be just the opposite. The president and the chairman of the Fed can make speeches and threaten to have the IRS or EPA or other agency look into a union or business if they don’t listen to his or her recommendations on wages and price changes. Quantitative monetary policy o Change the discount rate Deflation – lower Inflation – raise o Change the reserve ratio Deflation – lower 3 Inflation – raise o Buy or sell bonds Deflation – buy Inflation – sell Qualitative monetary policy o Selective credit controls Deflation – decrease Inflation – increase o Changing the margin Deflation – decrease Inflation – increase o Moral suasion Deflation – yes Inflation – yes 4