Chapter 15

Copyright © 2010 Pearson Addison-Wesley. All rights reserved.

Chapter 15

Money, Banking, and Central Banking


15-2

Chapter Outline

• The Functions of Money

• Properties of Money

• Defining Money

• Financial Intermediation and Banks

• Federal Deposit Insurance

• The Federal Reserve System: The U.S. Central Bank


15-3

Did You Know That...

• It is illegal to carry more than $5 worth on pennies or nickels out of the U.S.?

• Recent upswings in prices of zinc and copper have pushed the value of these metals used in the coins above the coins’ face value.

• By banning the international transport and melting of pennies and nickels, the government is trying to prevent people from profiting from selling coins that are already generating losses to taxpayers.


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Did You Know That… (cont’d)

• Coins, paper currency, and bank accounts from which people transmit debit-card and check payments are included in the Federal Reserve’s measure of the total amount of money that we can use to purchase goods and services.

• Money has been important to society for thousands of years and is part of our everyday existence.


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Money

• Money

– Any medium that is universally accepted in an economy both by sellers of goods and services and by creditors as payment for debts


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Table 15-1 Types of Money

2009: Mackerel fish?


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The Functions of Money

• The functions of money

– Medium of exchange vs. barter

– Unit of accounting

– Store of value (purchasing power) if ….

– Standard of deferred payment


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Properties of Money

• Liquidity

– The degree to which an asset can be acquired or disposed of without much danger of any intervening loss in nominal value and with small transaction costs

– Money is the most liquid asset.


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The Properties of Money (cont’d)

• Question– What is the cost of holding money (its

opportunity cost)?

• Answer – It is the alternative interest yield obtainable by

holding some other asset.


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Properties of Money (cont’d)

• Questions– What backs money?

– Is it gold, silver, or the federal government?

• Answer– Your confidence

– “Fiducia”=trust


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Defining Money

• Money is important– Changes in the rate at which the money supply increases

or decreases affect important economic variables (at least in the short run) such as inflation, interest rates, employment, and the level of real GDP.

• Money Supply– The amount of money in circulation


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Defining Money (cont'd)

• M1

– Currency

– Checkable (transaction) deposits

– Traveler’s checks not issued by banks

– Where are credit cards?


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Defining Money (cont'd)

• M2

= M1 plus1. Savings and small

denomination time deposits

2. Balances in retail money market mutual funds

3. Money market deposit accounts


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Financial Intermediation and Banks

• Most nations have a banking system that encompasses two types of institutions.

1. Private banking institutions.

2. Central bank.


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The Federal Reserve System (cont'd)

• Depository institutions – 7,500 commercial banks

– 1,300 savings and loans

– 11,000 credit unions

• All may purchase Fed services


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Figure 15-5 Bank Failures

Source: Federal Deposit Insurance Corporation.


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Federal Deposit Insurance

• In 1933, at the height of bank failures, the Federal Deposit Insurance Corporation (FDIC) was founded to insure the funds of depositors and remove the reason for runs on banks.– The FDIC is a government agency that insures the deposits

held in banks and most other depository institutions; all

U.S. banks are insured this way. – Problem: Moral Hazard


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Financial Intermediation and Banks (cont'd)

• Central Bank

– A banker’s bank

– Usually an official institution that also serves as a country’s treasury’s bank

– Central banks normally regulate commercial banks.


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The Federal Reserve System: The U.S. Central Bank (cont’d)

• The Fed

– The Federal Reserve System; the central bank of the United States

– The most important regulatory agency in the U.S. monetary system

– Established in 1913 by the Federal Reserve Act; signed by President Woodrow Wilson


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Figure 15-6 Organization of the Federal Reserve System

Source: Board of Governors of the Federal Reserve System, The Federal Reserve System: Purposes and Functions, 7th ed. (Washington, D.C., 1984), p. 5.


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Figure 15-7 The Federal Reserve System

Source: Board of Governors of the Federal Reserve System.


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The Federal Reserve System (cont'd)

• Functions of the Fed

1. Supplies the economy with currency (money)

2. Provides a payment-clearing system

3. Acts as the government’s fiscal agent

4. Supervises (regulates) depository institutions

5. Acts as a “lender of last resort”

6. Applies monetary policy


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Myth #15: The Fed is part of the government

• The Federal Reserve is operationally independent of the federal government

• However, the Fed was created out of the Federal Reserve Act of 1913; and Congress has the right to dissolve it and approve its Board of Governors

• The Fed also has to report to Congress twice a year

Chapter 15

Documents

Transcript of Chapter 15