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Money and the Federal Reserve System

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The relationship between the amount of money in circulation and the amount of ... Major function maintain the proper money supply for stable price level ... – PowerPoint PPT presentation

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Title: Money and the Federal Reserve System


1
Money and the Federal Reserve System
2
Four Functions of Money
  • Medium of exchange

3
Money is a tool for exchanging resources for
goods and services
4
Four Functions of Money
  • Unit of account

5
Four Functions of Money
  • Standard of deferred payment

IOU
6
Four Functions of Money
  • Store of Value

7
What has been used as money?
8
Wampum
  • Belts of beads
  • Beads made from seashells found in New York
  • Indians made good ones
  • Colonists didnt

9
What has been used as money?
10
The Price Level is determined by
The relationship between the amount of money in
circulation and the amount of goods and services
in the economy.
11
Requirements of Money
  • Confidence
  • Scarce
  • Even quality
  • Maintain value

12
Money Supply (M1)
  • Coins
  • Currency
  • Demand Deposits
  • Other checkable accounts

13
MV PQ
  • M money supply
  • V velocity of money, how many times the money
    supply is used to purchase final goods and
    services
  • P the price level
  • Q the quantity of real goods and services
    produced
  • PQ Nominal GDP

14
Inflation
  • Assuming V does not change, P is determined by
    the relationship between the change in the amount
    of money in circulation and the change in real
    goods and services.
  • Inflation is caused by an increase in M that is
    greater than an increase in Q.

15
The Federal Reserve (The Fed)
  • Established by Congress with the Federal Reserve
    Act of 1913
  • Major function maintain the proper money supply
    for stable price level
  • Too much money inflation
  • Too little money - unemployment

16
Two other functions
  • Banker to member banks
  • Banker to Federal Government

17
Twelve Federal Reserve Districts
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