Chapter 13 Money

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Chapter 13 Money

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Title: Chapter 13 Money


1
There is 800 billion in currency notes
coins.
2/3 is overseas
Money and Banking
Money paper notes coins Demand Deposits
52 2
46
Anything you can buy a candy bar with
2
7th-G-Chicago (1) 8th-H-St. Louis
(3) 9th-I-Minneapolis (1) 10th-J-Kansas City
(3) 11th-K-Dallas (3) 12th-L-San Francisco (4)
1st-A-Boston (0) 2nd-B-New York
(1) 3rd-C-Philadelphia (0) 4th-D-Cleveland
(2) 5th-E-Richmond (2) 6th-F-Atlanta (5)
Paper notes printed at 1. FW Currency Center 2.
Washington D.C.
Coins minted at 1. Denver 2. Philadelphia 3. San
Francisco
3
Dollar Decoded
Bills are crowded with numbers and letters
that help the U.S. Treasury track printing
errors authenticate currency. Heres what
many of them mean
Fed bank that issued the bill Chicago
Last letter tells how many times serial number
has run
Number corresponds to letter in circle
indicating issuing Fed bank.
First letter corresponds to issuing Fed bank
4
Bogus Bills fined up to 5,000 5,000 arrested
in 2002 -imprisoned up to 15 years.
Notice that counterfeiting has really decreased
with the new security features.
48 M
46 M
62 M
2004
2006
The so-called supernote a counterfeit 100
bill of extremely high quality began showing
up around 1990. Most of worlds bogus bills
come from Columbia North Korea. Columbia
borders Ecuador, which converted to the U.S.
dollar in 2000. The 20 bill is the most
popular domestic counterfeit bill, while the
100 bill is most popular among foreign
counterfeiters. Of the fake bills found in the
U.S. in 2002, half were produced with
computers, copiers, and printers, up from just 1
in 1996. Only about 3/100ths of 1 is
counterfeited.
5
History of U.S. Money
Beaver skins 1600s-1800 were traded to the
Indians for wampum clamshells.
Tobacco Leaves became legal tender in 1642.
Cut nails were used as change. 100 nails were
worth 10 pence.
Pine Tree Shilling 1642-1684 became the first
minted American coin.
Spanish milled dollar was the main coin of the
1770s. Piece of Eight
Two bits, four bits, six bits…
An average colonial worker earned two bits a
week.
6
Colonial Times

Colonists brought coins with them but sent
them back to Europe to pay for European goods.
This led to a shortage of coins, so Indian
wampum 1600-1800 beads of polished clam
shells strung in strands was used as money. It
lost its value when they started counterfeiting
wampum. Also used as money were staples of
the local economies such as tobacco, grain,
and fish. Nails and bullets frequently were
used for small change. Until 1857, the
Spanish eight-reale coin was used because it
had a higher content of pure silver and they
could be cut to make change. Two bits, four
bits The first coin minted in the colonies was
the pine tree shilling 12 pence or pennies
1652. They also minted the willow and oak
shilling. Hundreds of different types of paper
notes such as the five shilling note
were printed in the colonies denominated
in pounds and shillings and made reference to
the crown of England for credibility.
























































7
The Continental
(1775-1781) 1/61/21/3123456830
/40456080 Between 1775-1781, almost
250 million in continental currency
The United Colonies was printed. There was so
much of it, it created demand- inflation in the
extreme. They were not worth much because people
didnt think it could be backed by gold or
silver This, even though the Continental Congres
s made it treason not to accept continentals.
not worth a continental From
1775-1779, inflation was 8.5 per monthwent from
6 M in circulation to 263 M. The MS rose to
10 times its previous level as price
climbed more than 100 times their previous level.
It took 146 to buy what 1 would in 1775.
As George Washington commented A
wagon-load of money will scarcely purchase a
wagon-load of provisions.
1/6 of a Dollar
1/3 of a Dollar
8
Continental Currency 1775-1781 1/61/21/3
2/312345683040456080
9
Wildcat Banking 1790-1860
Over 3,000 banks issued 10,000 bills but
5,000 were counterfeit.
Because some banks were more sound than others, a
5 note at one rarely had the same purchasing
power as a 5 note at another.
State banks issued paper notes in denominations
from 1 to 13. They lost their value the farther
away you were, thus the name, wildcat banking,
only a wildcat could get back to a distant bank
to verify its authenticity.
10
Greenbacks This 450 million brought on severe
inflation.
Civil War
Money 1860-1865 Both the Union the
Confederacy paid troops with notes. In 1861,
the nation issued Greenbacks 1st paper money
issued by the federal G. These 5s, 10s,
20stotal of 10 M were redeemable in
coins. In 1862, 450 M in U.S. notes, from
1-10,000 replaced the Greenbacks.
Because of widespread hoarding of coins,
Congress issued 5, 10, 25, 50 cent notes. They
were called paper coins or shinplasters.
Northern prices doubled from 1861-1864. The
South issued Confederate notes. Note-holders were
to be repaid in gold silver after the Civil
War. Northerners printed up counterfeit
confederate notes so these notes increased
20-fold from 1861-1865 and inflation increased
9,200. 2 billion from .50 to 1,000 printed.
11
Yap Island Money
Yap Island is a tiny, U.S. trust
territory in the S. Pacific, 500 miles from
Guam. It is one of the 4 Federated States
of Micronesia has 12,000 Yapese 6,000 rai
limestone stones.
12
Money and Banking
Money is the grease that lubricates the
economic machinery of the world. It reduces
the friction of the voluntary exchange. Too
little oil can leave some parts creaking too
much oil can gum up the works. Similarly, too
little or too much in circulation makes exchange
more difficult and creates economic problems.
Money is the only commodity that is good for
nothing but to be gotten rid of. It will not feed
you, cloth you, shelter you, or amuse you unless
you spend it or invest it. People will do
almost anything for money and money will do
almost anything for people.
13
Overview of Money, The Fed and Monetary Policy
  • 1. The functions and measurement of money
  • 2. The Federal Reserve and its functions
  • 3. Fractional reserve banking how it works
  • 4. The Money Multiplier MM1/RR(.10)10
  • 5. Tools of Monetary Policy
  • a. Discount Rate - rate the Fed charges banks
  • b. Reserve Ratio- of deposits banks have to
  • keep in reserve and can not loan out.
  • c. Buying (recession) selling (inflation)
    of bonds

14
.
Objectives 1. Three functions (roles) of money
a. medium of exchange b. unit of account
c. store of value 2. What constitutes money in
our economy? (paper
dollars-52)
(coins-2) b. DD-46 3. What backs
the money supply? (gold/silver/the faith of
the G) 4. Explanation of the demand for
money. Dt Da DM 5. The four-part
make-up of the Federal Reserve a. Board of
Governors b. FOMC c. 12 Fed Banks d. Member
banks Money any good widely accepted for goods
and services or repayment of
debt. Money is anything generally acceptable as
a medium of exchange.
a. Currency
Faith of the G
15
Three FUNCTIONS OF MONEY
1. Medium of Exchange any asset that sellers
will accept as payment for g/s
Medium means something in the middle, so money
is a medium of trade between buyers and
sellers because it can be exchanged for
something else.
Avoids double coincidence of wants that
bartering requires. You would have to have a
trading partner who wants to sell you goods
you want to buy and wants to buy goods
you want to sell.
Liquidity how easily an asset can be
converted into cash without any additional
expense. Cash has 100 liquidity
16
Three FUNCTIONS OF MONEY
249.00
2. Unit of Account measuring the relative value
of goods by stating prices
Example Microsoft Stock is selling for 50 a
share. The new Jag is selling for
32,000. A 2 item is twice as valuable as a 1
item.
Money is like a yardstick. People use it
to compare the worth of things that they buy and
sell.
17
Three FUNCTIONS OF MONEY
Greek Coin 2,500 years old
3. Store of Value storing wealth from one point
in time to another doesnt wear out easily and
holds up to inflation
Ability of money to hold value over time Money
that lacked durability or did not hold up well
to inflation would not make good money would not
store value.
Ice cream cones would suffer monetary meltdown,
become a sticky puddle. If money suffers high
inflation, it causes the value of money to
melt.
Other desirable qualities for money are A.
Scarcity B. Portability C. Divisible D.
Difficult to counterfeit
18
The Two Types of Money
  • Commodity Money something that performs the
    function of money and
  • has alternative, non-monetary uses.
  • Examples Gold, silver, cigarettes, corn
  • Fiat Money something that serves as
  • money but has no other important uses.
  • Paper notes
  • Coins

19
Money In The American Economy
Currency DD equal M1 Spendable Money
M1
M2
MZM
Also included here would be Travelers checks,
Checklike deposits NOW and Super NOW Accts
M1 Completely Liquid
1,375 billions
2 52 46
M1 savings deposits, small TDs like CDs
bonds under 100,000, MMMFs for individualsM2
M2 2 more categories money zero maturity
MZM money available at 0 cost to HH
businesses So, subtract small TDs add MMMFs
owned by businesses no penalty to spend MMMFs
V how many times a dollar changes hands in a
year
6,758
6,934 Billions
V GDPY/M1 13 tr./1.3 tr. 10
20
WHAT ABOUT CREDIT CARDS? Are They Money?
They are not plastic money. They do serve as
a 1. medium of exchange the 2. credit card
statement serves as a unit of account. 3. but,
they do not have a store of value. If the
credit card company goes out of business or
decides not to honor your card, it is
worthless. They are not money because they
dont store value.
21
WHAT ABOUT Debit CARDS? Are They Money?
Debit cards are money. They serve as a 1.
medium of exchange they also serve as a 2.
store of value (not an extension of credit)
and 3. debit card statements serve as a unit
of account.
Debit Card
22
Our Money Is Growing More Abstract
Money has grown increasingly more abstract -
from a physical commodity, - to a piece of
paper representing a claim on a physical
commodity, - to a piece of paper of no
intrinsic value, - to an electronic entry
representing a claim on a piece of paper of
no intrinsic value.
just a Federal Reserve note
23
The Value of Money and Price Level
Value of Money
Prices
The value of money goes in the opposite
direction of the general price level. Or, the
amount a dollar will buy varies inversely with
the price level.
24
Old Bond Prices and the Interest Rate
1,000 x .08 80
1,333 x .06 80
800 x .10 80
25
Normal, Flat, Inverted Yield Curves and the
Liquidity Trap
So, an Inverted Yield Curve would exist in an
interest rate environment in which  short-term
bonds  have a higher yield than long-term bonds,
caused by inflation now but expect the economy to
slow in the future.
Short-term bonds yield less than long-term bonds
Normal yield curve
8
The economy is predicted to grow.
Yield on bonds
Flat yield curve
6
Short-term long-term bonds yield about the same
Transition between normal inverted curves
5
Inverted yield curve
4
Long-term bonds yield less than short-term bonds
Rare predictor of recession
1 Yr
30 Yr
10Yr
1 Yr
Maturity of bonds
An economy's bond rates are more apt to have an
inverted yield curve when (A) the economy's
real output is increasing. (B) the economy
is experiencing inflation. (C) the economy
is exporting more. (D) the economy's
price level is constant. (E) the economy is
importing more.
26
Money NS 1-13 1. The most
important function of money is as a (unit
of account/store of value/medium of exchange). 2.
If you are estimating that it will take 5,000 to
escort Suzie Rah Rah to the prom so that you
can demonstrate your talent with the Econ
Rap, you are using money as a (unit of
account/store of value/medium of exchange). 3. If
you place some of your Krogers earnings in a
safety deposit box so that you can get your
boyfriend, Roger Rocket, a pair of roller
blades for Christmas, you are using money as a
(unit of account/store of value/medium of
exchange). 4. Estimating expenses for AM at
13,001 illustrates money serving as a (unit
of account/store of value/medium of exchange). 5.
If Suzie Nomics writes a check for a new Honda,
she is using money as a (unit of
account/store of value/medium of exchange). 6. M1
also called transactions money or medium of
exchange money or spendable money is
comprised of coins, paper money and (gold
certificates/checkable deposits). 7. The major
component of M1 is (currency/checkable
deposits). 8. The volume of M1 is closer to
(1/3/4) trillion. 9. (M1/M2) includes
non-checkable savings accounts, MMAs TDs under
100,000. 10. (Fiat/Commodity) money is money
because the G says that it is G fiat. 11. The
value of money varies (directly/inversely) with
the price level. 12. If the price index increases
from 100 to 120, the value of the dollar will
fall by (one third/one fifth/one fourth). 13.
The money supply is backed by (silver/gold/the
government).
27
3 Tools of Monetary Policy
1. Discount Rate banks borrow from the Fed
(symbolic) 2. Required Reserve - of DD which
cannot be loaned. 3. Buy/Sell Bonds government
debt - 3 mo., 6 mo., 1 year
purchase price 10,000 - 2 yr.,
3 yr., 5 yr.,(5,000), 10 yr., (10,000)
- 30 years with purchase of
1,000 Federal Funds Target Rate overnight
lending rate between banks to
correct a temporary imbalance in reserves.
Inflation Raise Raise Sell
Recession Lower Lower Buy
AS
AS
AD
LRAS
AD
AD
AD
Prime Rate-loan rate to the best (prime)
customers.
YYI
YR Y
Real GDP 2.3
17 increases
4
28
Easy Money During Recessions
MS1
MS2
DI
Students, should the Fed buy or sell bonds to
jumpstart this economy?
Investment Demand
10 8 6 0
10 8 6 0
Nominal Interest Rate
Buy
DM
If there is RECESSION MS will be increased.
Money Market
QID1
QID2
AD1 CIgGXn
AD2
LRAS
Easy Money (Buy/Sell) bonds, which
(increase/decrease) MS, which (increase/decrease)
interest rates, which (appreciate/depreciate) th
e dollar, which (increase/decrease) C, Ig, Xn,
which (increase/decrease) AD therefore, PL,
GDP, emp.
AS
Jobs are tough to get.
Price level
P2
E2
P1
E1
YR Real GDP
Y
29
Tight Money during Inflation
DI
MS1
MS2
Dm
Now, should I buy or sell?
Investment Demand
10 8 6 0
10 8 6 0
Nominal Interest Rate
Sell
If there is INFLATION, MS will be decreased.
Money Market
QID1
QID2
AS
LRAS
Tight Money (Buy/Sell) bonds, which
(incr/decr) the MS, which (incr/decr) in. rates,
which (apprec/deprec) the dollar, which
(incr/decr) C, Ig, Xn, which (incr/decr) AD,
PL, GDP.
AD2
Ill get rid of some money.
P1
E1
P2
E2
AD1
YI
Y
30
Demand For Money Demand for cash in hand
For Daily, Weekly, Monthly Transactions
Mortgage/rent Utilities Gas Food Emergency
money Tuition for kids Christmas gifts
Transactions Demand, Dt
M1 Independent of interest rate Direct
with Nominal Y Medium of Exchange
M1
Valentine candy for wife
Gift for the girlfriend
We keep this transaction money(M1) in our wallet,
under our mattress, or in our checking accounts.
31
THE DEMAND FOR MONEY


Transactions Demand, Dt
Asset Demand, Da
Da M2 Money that we dont need
for daily, weekly, or monthly transactions. We
will invest more of it the higher the interest
rate. We will hold less because the opportunity
cost increases.
Walking around money
M1
Dt independent of the interest rate
Da
Interest Rate Oppor. Cost Dahold less
Interest Rate Oppor. Cost Dahold more
10 8 6 4 2 0
CDs or
5
Da varies inversely with the interest rate.
1
0 50 100 150 200
32
THE DEMAND FOR MONEY


Transactions Demand, Dt
Asset Demand, Da
Total demand for money, Dm
independent inverse
M
10 7.5 5 2.5 0
50 100 150 200 250 300
33
THE DEMAND FOR MONEY


Transactions Demand, Dt
Asset Demand, Da
Total demand for money, Dm
MS1
MS2
MS
10 7.5 5 2.5 0
E
Rate of interest, i (percent)
5
Dm
0 50 100 150 200 250 300
0 50 100 150 200 250 300
Money market
1. At equilibrium 5 I.R., the amount of money
demanded for transactions is (0/50/100) and
the amount demanded as an asset is (0/50/100). 2.
If the interest rate were 10, the amount of
money demanded for Dt would be (0/50/100)
the amount demanded as an asset would be
(0/50/100). 3. Da slopes down because lower in.
rates (incr/decr) the cost of holding money.
34
at E, money supplied (200) money demanded
(200)
The Money Market
The Dm curve represents the quantity of
money people are willing to hold at various
interest rates.
7.5 5 2.5 0
MS
Dm
E
Nominal Interest Rate
50 100 150 200 250 300
Money Market
Due to a recession, suppose the money supply
is increased from 200 billion to 250
billion.
35
at E, money supplied (200) money demanded
(200)
The Money Market
A temporary surplus of 50 billion beyond which
the people wish to hold, so money becomes
a hot potato.
MS2
MS1
S1
S2
10 7.5 5 2.5
Dm
P2
Nominal Interest Rate
Price of Bonds
P1
They react by buying bonds pushing bond
prices up to meet the desired level of
liquidity.
E
of Bonds
0 50 100 150 200 250 300
Money Market
36
Liquidity Trap
MS1
MS2
1
LRAS
SRAS
Dm
AD
AD
Nominal Interest Rate
PL
GDP
YD
E
0
500
Money Market
Liquidity Trap in a stagnant economy with
interest rates near or at zero, an increase in
MS fails to stimulate AD, so recession or
depression gets worse. With low returns expected
on financial investments, people hoard their
money. Banks are unwilling to lend in a slack
economy. Fiscal policy is needed here.
37
at E, money supplied (200) money demanded
(200)
The Money Market
Due to inflation, suppose the money supply is
decreased from 200 billion to 150 billion.
7.5 5 2.5
MS
Dm
E
Nominal Interest Rate
0 50 100 150 200 250 300
Money Market
38
The Money Market
A temporary shortage of money will require the
sale of some assets bonds-which will make
their price fall to meet the money shortage
need.
MS2
Dm
MS1
S2
S1
10 7.5 5
P1
Nominal Interest Rate
Price of Bonds
P2
E
of T-bills
0 50 100 150 200 250 300
Money Market
39
Thrifts Earn More, Pay Less Commercial Banks v.
Thrifts (SLs, Credit Unions, Mutual Savings
Banks
  • Thrifty deal because with no taxes or
    stockholders to pay, thrifts
  • can pay higher returns on deposits charge lower
    rates on loans.
  • Interest Paid On Deposits Credit Unions
    Banks
  • Checking accounts 0.39 0.14
  • Money Market Accounts 1.02 0.32
  • 1-Year CD 2.15 1.48
  • 5-Year CD 4.23 3.38
  • Interest Charged on Loans Credit Unions
    Banks
  • New-car loans 5.26 7.23
  • Home equity loan 4.38 4.73
  • Variable rate credit card 10.21 12.60
  • Personal loan 12.39 14.43

40
Financial Reform Act - 1980
  • This act eliminated many historical
    distinctions between financial
  • institutions. These once staid financial
    institutions moved into the
  • fast lane. They could now wheel and deal with
    other peoples
  • money but with the benefit of deposit insurance.
  • Commercial Banks 7,600
  • Thrifts 11,400
  • Credit Unions 9,490
  • Savings and Loans 1,404
  • Mutual Savings Banks 387
  • Prior to 1980
  • Commercial banks issued checking accounts
    others could not and gave
  • business loans no interest was allowed to be
    given on these checking accts.
  • Non Commercial Banks accepted savings deposits
    3 and made
  • mortgage loans 6. They started issuing NOW
    Accounts which paid
  • about 5 if you kept 1,000 in. People were not
    writing checks, they
  • were writing Negotiable Orders of Withdrawal.
    They may not have
  • been called checking accts but they looked like
    checking accounts,
  • sounded like checking accounts, smelled like
    checking accounts, and
  • were even represented to customers as checking
    accounts.

41
Deregulation Act of 1980
  • 1. All were now allowed to issue interest-bearing
    checking deposits.
  • Commercial banks had been forbidden to pay
    interest on checking
  • accounts, while thrifts claimed to be paying
    interest on savings accts
  • 2. SLs could give auto and real estate loans.
  • 3. There was no limitation on interest rates
    paid.
  • 4. All depository institutions were now subject
    to the Feds legal RR.
  • 5. All now enjoyed the advantages that only Fed
    member banks formerly enjoyed-including check
    clearing borrowing from the Fed
  • The worst SL scandal was Lincoln
    SL in California
  • under Charles Keating (3 billion
    horror story). Five
  • senators including John McCain
    received 1.5 million
  • in campaign contributions to influence
    regulators.
  • Keating got 12 years in prison had
    to pay 122 million
  • although the government could never find
    any of his assets.
  • This will cost around 300 billion
    the worst financial
  • mistake since the Great Depression.

Charles Keating
42
Commercial Bank/Thrift Failures
43
Cost of Bank/Thrift Failures
44
The Federal Reserve - 1913
A. Boston B. New York C. Philly D. Cleveland E.
Richland F. Atlanta G. Chicago H. St. Louis I.
Minneapolis J. Kansas City K. Dallas L. San
Francisco
45
Twelve Fed Banks and 25 Branches
7th-G-Chicago (1) 8th-H-St. Louis
(3) 9th-I-Minneapolis (1) 10th-J-Kansas City
(3) 11th-K-Dallas (3) 12th-L-San Francisco (4)
1st-A-Boston (0) 2nd-B-New York
(1) 3rd-C-Philadelphia (0) 4th-D-Cleveland
(2) 5th-E-Richmond (2) 6th-F-Atlanta (5)
46
The Feds 25 Branches
Fed
Quasi-Public Banks. in combo Blend of private
ownership (corporations) but public (government)
control The 12 banks are instruments of the
government but not owned by the government. The
over 5,000 banks in the 12 districts buy stock
(1 per share) in their district bank ( get 6
dividends no capital gains) so the banks are
privately owned. Serving the public, it is owned
by citizens. The 12 banks are a corporation
owned by the banks in their districts, but
a public (G) agency directly responsible to
Congress. They might make 30 billion - 90 to
Treasury.
47
First Dallas Fed 1921 at Akard and Wood
48
Current Dallas Fed at 2200 N. Pearl
Richard Fisher - President of Dallas Fed. Majored
in economics at Harvard
49
Four Part Structure of the Fed
  • Seven Board of Governors
  • - most important body of the Fed
  • - appointed by the President and
  • confirmed by the Senate
  • - 14-year terms are staggered
  • (one replaced each two years)
  • they are paid 162,100
  • - isolation from political pressure
  • (only one 14 year term)

- the Chairman serves only four years but
can be reappointed 4-year renewable
term 4 times His pay is 180,100. Every
president gets to appoint at least two. Clinton
appointed eight and Bush appointed 4 in 1st
2 years.
50
2. Federal Open Market Committee FOMC
-Feds main policy-making arm -includes 7 Board
of Governors, NY Fed President, and 4 other
bank presidents (rotate among the other 11
every 3 years) -other 7 bank presidents are
non-voting members -they meet every six
weeks -they make about 30 bil. a year (90
goes to the Treasury)
51
The FOMC Meeting Room in Washington DC The
FOMC meets around a 27-foot oval mahogany
table in a room with a 23-foot ceiling with a
1,000-pound chandelier.
52
3. Twelve Fed Banks and 25 Branches
53
4. Several Thousand Member Banks
54
Functions of the Fed
Destroy/Issue paper notes
Refund Check
The Fed clears 40 Banks clear
rest electronically.
55
Margin Calls went from 65 to 50 in 1974
  • Lets say you buy 100 shares of Playboy stock
    at 100 a share which would cost 10,000. You
    only buy 50 shares with cash (5,000) and buy
    50 shares on margin at 10 (so, you owe
    5,500). Your 50 shares worth 5,000 is your
    collateral.
  • If Playboy stock drops to 50 per share the
    50 shares you own are worth only 2,500 (your
    collateral now will not cover what you owe
    5,500. So the broker may make a margin call
    for 3,000 and if you cant pay it he might
    sell your stock for 2,500 and tell you that you
    still owe 3,000 more. If you could have paid
    the 3,000, he may have let you keep your 50
    shares.
  • So market slides can lead to sell-offs.

56
The Check Clearing Process
Roger Econ and Suzie Nomics
Roger writes a 1,000 check on his Dallas
Bank and sends it to Suzie in L.A.
Suzie and Her Los Angeles Bank
Suzie endorses the check and deposits it in her
local bank in Los Angeles. The balance in her
account rises by 1,000. The Los Angeles
Bank the San Francisco Fed Suzies local
bank in L.A. sends the check to the Fed Bank of
San Francisco, which increases the reserve
account of the L.A. bank by 1,000 decreases
the reserve account of the L.A. Bank by 1,000
and decreases the reserve of the Dallas bank
by 1,000. The San Francisco Fed and
Dallas Bank The San Francisco Fed sends the
check to Rogers bank in Dallas which reduces
his account by 1,000.
Fed
57
First Board of Governors, 1914
58
Kevin Warsh Unexpired term to 1/31/18
Donald Kohn Vice Chairman to 1/31/16
Ben Bernanke, Chairman to 1/31/10 1590 on SAT
Vacant
Randall Kroszner Unexpired to 1/31/08
Frederic Mishkin Unexpired to 1/31/14
Vacant
www.federalreserve.gov/BIOS/
59
Ben Bernanke Believes In Core Inflation
Targeting Here is How It would Work
2
The Fed would choose and publish a target goal
for core inflation ofsay, 2 a year..
The Fed publicly estimates how high it expects
inflation to be in the coming year. It steers
monetary policy to try to hit the
target inflation rate. The Fed, in effect, is an
inflation hawk.
If inflation is getting above the target, the
bank raises interest rates to cool the
economy. If inflation is too low, the Fed
would lower interest rates to juice up growth.
The Target Rate is used in Britain, Canada,
Australia, Sweden, New Zealand, Brazil, and South
Korea, working well in all seven.
In a crisis like 9/11, the Fed could still do
what was necessary to stabilize the
economy, that is, lower interest rates further.
Earthquake
60
NS 14-21
  • 14. The transaction demand making daily, weekly,
    monthly transactions for money is most closely
    related to money functioning as a (medium of
    exchange/store of value).
  • 15. The asset demand for money is most closely
    related to money functioning as a (medium of
    exchange/store of value).
  • 16. If nominal (money) GDP is 900 billion, and
    on the average, each dollar is spent three times
    per year, then the amount of money demanded for
    transaction purposes will be (200/300/400).
  • 17. The Dt will shift to the right as a result of
    a(n)
  • (increase/decrease) in nominal GDP. The
    Dt will
  • shift to the left as a result of an
    (increase/decrease)
  • in nominal GDP.
  • 18. The asset demand for money varies
  • (directly/inversely) with the interest
    rate.
  • 19. The basic policy-making body in the American
    banking system is the (Council of
    Economists/Board of Governors).
  • 20. The Fed was created in (1900/1913/1929/2004)
  • 21. Commercial Banks and thrifts, since 1980,
    have become increasingly (similar/dissimilar).

61
NS 22-26
MS2
5
5
5
400
200
200
  • 22. The transaction demand for money (walking
    around money) is
  • shown by (D1/D2/D3).
  • 23. The asset demand for money (betting money)
    is shown by (D1/D2/3).
  • 24. The total demand for money is shown by
    (D1/D2/D3).
  • 25. If each dollar held for transaction purposes
    is spent 4 times per year,
  • nominal money GDP is (200/400/600/800)
    .
  • 26. If the Fed increased the MS, the MS curve
    would shift (right/left) and the interest rate
    would (rise/fall).

62
NS 27-28
  • 27. The (Fed/Council of Economic Advisors) hold
    the deposits of commercial banks, provide for
    the collection of checks, act as fiscal agent for
    the federal government, and exercise supervisory
    power over member banks.
  • 28. In the U.S. economy, it is the
    (President/Congress/Fed) who controls the money
    supply.
  • 29. The 12 Fed banks are (privately/publicly)
    owned and (privately/publicly) controlled central
    banks whose basic goal is to control the money
    supply and interest rates in stabilizing the
    economy.
  • 30. The term thrift includes SLs, credit
    unions, and
  • (mutual savings banks/ commercial banks).

63
The End