Money and BankingMoney and Banking

There is $1.2 trillion$1.2 trillion in currency [notes & coins].

$38 million$38 million in notes is

printed each day.

Dollar DecodedDollar Decoded

Fed bankFed bankthat issuedthat issued the bill the bill

[Chicago][Chicago]

Bills are crowded with numbers andletters that help the U.S. Treasury trackprinting errors & authenticate currency.Here’s what many of them mean:

Number corresponds to letter in Number corresponds to letter in circle indicating issuing Fed bank.circle indicating issuing Fed bank.First letter correspondsFirst letter corresponds

to issuing Fed bankto issuing Fed bank

Last letter tells how many Last letter tells how many times serial number has runtimes serial number has run

25 Branches25 Branches

The letter on the billThe letter on the billlets you know wherelets you know whereit originated.it originated.

““Two bits, Two bits, four bits, six four bits, six bitsbits…”…”

History History of of U.S. MoneyU.S. Money

AAn n average average colonial workercolonial worker

earned two bits a week. earned two bits a week.

Beaver skins [1600’s-1800] were traded to the Indians for wampum.

TTobaccoobacco L Leaves became eaves became llegal egal tendertender in in 1642.1642.

Cut nails Cut nails were used aswere used as change. change.100 nails 100 nails werewere w worth orth 10 pence.10 pence.

Pine Tree Shilling Pine Tree Shilling [1642-1684][1642-1684] becamebecame the first minted American coin.the first minted American coin.

Spanish milled dollar was the Spanish milled dollar was the main coin of the 1770’s.main coin of the 1770’s. [“Piece of Eight”][“Piece of Eight”]

Colonial TimesColonial Times Colonists brought coins with them but sent them back to Europesent them back to Europe to payfor European goods. This led to a shortage of coinsshortage of coins, so Indian Indian WampumWampum[1600-1800] – beads of polished clam shells strung in strands – was usedas money. It lost its value when they started counterfeiting wampumcounterfeiting wampum. Alsoused as money were staples of the local economies – such as tobacco, grain, and fish. Nails and bulletsNails and bullets frequently were used for small used for small changechange.

Until 1857, the Spanish eight-realeSpanish eight-reale coincoin was used because it had a higher content of pure silver and they could be cut to make change.[“Two bits, four bits”][“Two bits, four bits”]

The first coin mintedfirst coin minted in the colonies was the pine tree shillingpine tree shilling [12 penceor pennies] [1652]. They also minted the willow and oak shillingwillow and oak shilling. Hundredsof different types of paper notes [such as the five shilling note] wereprinted in the colonies denominated in pounds and shillings and madereference to the crown of England for credibility.

Gold CertificatesGold Certificates (1865-1933) (1865-1933) & Silver CertificatesSilver Certificates (1878-1964 (1878-1964)) To increase its reserves of precious metals, the U.S. issued these. The largest was a$100,000 gold certificate which was not available to the public but was used only amongFed banks. Silver certificatesSilver certificates had denominations from $1 to $1,000$1 to $1,000.

Federal Reserve NotesFederal Reserve Notes (1914-Fed was established in 19131914-Fed was established in 1913) Modern coins are produced by mints in Phil., S.F., & Denver. Federal Reserve Notesmake up more than 99.9% of today’s paper currency. Notes of denominations from $5 to$10,000 circulated until 1946. Since 1946, all notes greater than the $100 were retired.The $1 note was not introduced until 1963 [previously the $1 silver certificate served as$1 silver certificate served asthe $1 billthe $1 bill]. In 19291929, all notes were reducedall notes were reduced by about 1 inch in length and about ½ inchin width. $500 million of paper money is shredded each day.

Under the goldgoldstandardstandard, $35 $35 ofof

currency currency couldbe redeemed forone ounce of one ounce of goldgold. You could bring$35 of bills$35 of bills to theU.S. Treasury andexchange it foran an ounce ounce of of goldgold.

Yap Island MoneyYap 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 ofMicronesia & has 12,000 Yapese & 6,000 “rai” 12,000 Yapese & 6,000 “rai” limestone stones. limestone stones.

Money and BankingMoney and Banking

MoneyMoney is the grease grease that that lubricates lubricates the the economic machineryeconomic machinery ofthe world. It reduces the friction of the voluntary exchange.Too little oil can leave some parts creakingToo little oil can leave some parts creaking; too much oil can too much oil can gum up the worksgum up the works. Similarly, too little or too much in circulationmakes exchange more difficult and creates economic problems.

““Money is the only commodity that is good for nothing but toMoney is the only commodity that is good for nothing but tobe gotten rid of. It will not feed you, cloth you, shelter you, orbe gotten rid of. It will not feed you, cloth you, shelter you, oramuse you unless you spend it or invest it. People will do amuse you unless you spend it or invest it. People will do almost anything for money and money will do almost anythingalmost anything for money and money will do almost anythingfor people.for people.

Overview of Money, The Fed and Overview of Money, The Fed and Monetary PolicyMonetary Policy

1. The functionsfunctions and measurement of money 2. The Federal ReserveFederal Reserve and its functions 3. Fractional reserve bankingFractional reserve banking & how it

works 4. The Money MultiplierMoney Multiplier [ MMMM=1/RR(.10)=10=1/RR(.10)=10] 5. Tools of Monetary PolicyTools of Monetary Policy a. DiscountDiscount RRateate - rate the Fed charges banks b. Reserve RatioReserve Ratio--% of deposits banks have to

keep in reserve and can not loan out. c. BBuyinguying (recessiorecession) & ssellingelling (inflationinflation) of bbondsonds

Barter Barter – goods and services were – goods and services were traded without the exchange of money.traded without the exchange of money.

However, before trade could occur, there had to be a “double coincidence“double coincidence of of wants”wants”. Each trader had to have something the other wanted.

I’ll trade you a chicken for a pair

of shoes.

I would love to sell you these shoes but I can’t eat chicken, due to my bad teeth, caused by smoking.

In a barter economybarter economy a chickenchicken

farmer who wants to buy shoesshoes

may have to first trade chickenschickens

for apples apples and then apples apples for

shoes shoes because the guy selling

shoes shoes wants only applesapples. Money eliminates this problem.

Or, a heart surgeon might accept only

certain goods (like pineapples )

but not others ( like broccoli) because he doesn’t like broccoli.

You are lucky you are a pineapple farmer and not a broccoli farmer. I hate broccoli.

.

• It is less expensiveless expensive to use money.• Using money saves timesaves time and time istime is moneymoney.

The “calculation of exchange”“calculation of exchange” by bartering bartering is much slower than the “calculation of exchange”“calculation of exchange” in a monetary systemmonetary system.

It is less expensiveless expensive to use money. The “calculation“calculation of of exchange”exchange” is fast & easyfast & easy because whatever the price is, you pay that amount.

$$2.002.00

Here’s $2.00 for one pig.

““She’s fast.”She’s fast.”

.

Let’s say that I own a pigpig. If I want to buy a “jukebox“jukebox””, I don’t want to trade the whole pig.

• This negotiation will not be fast and easynot be fast and easy.• I decide on the rear part of the pigrear part of the pig [plus the curly tailcurly tail].

I had to do some calculations on howmuch of the pig I wanted to give up.

• Money is also easier to taxeasier to tax. • So a monetary system is bettermonetary system is better than a barter barter

systemsystem.

The monetary system enables the “calculation“calculation of exchange”of exchange” to go much faster.

Three Three FUNCTIONS OF MONEYFUNCTIONS OF MONEY

1.1. Medium of ExchangeMedium of Exchange[any asset that sellers will accept as payment for g/s]

Avoids “double coincidence of wants”Avoids “double coincidence of wants” that bartering requires.You would have to have a trading partner who “wants “wants to to sellsellyou goods you want to buy”you goods you want to buy” and “wants to buy “wants to buy goods you want to sell.”goods you want to sell.”LiquiditLiquidity y – how easily an asset can be converted into cash cash without any additional expense. [Cash has 100% liquidityCash has 100% liquidity]

MediumMedium means “something in the middle”“something in the middle”, so money is a “medium of trade “medium of trade between buyers and sellers”between buyers and sellers” because it can be exchanged for something else.

Three Three FUNCTIONS FUNCTIONS OF OF MONEYMONEY

2.2. Unit of AccountUnit of Account[measuring the relative value of goodsrelative value of goods by stating pricesstating prices]

Example: MicrosoftMicrosoft Stock is selling for $50$50 a a shareshare. The new JagJag is selling for $32,000.A $2 item is twice as valuable as a $1 item.

Money is like a yardstickyardstick. People use it to compare the worth of things that they buy and sell.

$249.00$249.00

Three Three FUNCTIONS OF MONEYFUNCTIONS OF MONEY

3. 3. Store of ValueStore of Value [storing wealthstoring wealth from one one point inpoint in time time to anotherto another]

[doesn’t wear out easily and holds up to inflationdoesn’t wear out easily and holds up to inflation]

Ability of money to hold value over timehold value over time[Money that lacked durabilitydurability or did not hold up well to inflationinflation would not make good money [would not store valuenot store value].

Other desirable qualitiesdesirable qualities for money are:A. ScarcityScarcity B. PortabilityPortability C. DivisibleDivisible D. Difficult to counterfeitDifficult to counterfeit

Greek CoinGreek Coin2,500 years old2,500 years old

• Commodity MoneyCommodity Money: something that performs the function of money and

has alternative, non-monetary usesalternative, non-monetary uses.– Examples: Gold, silver, cigarettes, corn

• Fiat MoneyFiat Money: something that

serves as money but has no other important uses.

– Paper notes– Coins

The Two Types of MoneyThe Two Types of Money

M1M1 M2M2 M3M3

$2,575$2,575[billions][billions]

$12,000$12,000[Billions]

M1M1 + + savings deposits, small TDs savings deposits, small TDs [like CDs [like CDs

& bonds]& bonds] under $100,000, under $100,000, and and MMA’s MMA’s == M2M2M2M2 + + large time dlarge time depositseposits over $100,000over $100,000 = = M3M3

VV [Velocity] = [Velocity] = GDP[Y]/M1 = 12 tr./1.2 tr. = GDP[Y]/M1 = 12 tr./1.2 tr. = 1010

CurrencyCurrency + + DDDD equal equal M1M1 [[Spendable MoneySpendable Money]]

““VV”” – how many times a dollar changes hands in a year – how many times a dollar changes hands in a year

AAlso lso included here included here would bewould be Travelers checksTravelers checks, , Checklike depositsChecklike deposits [[NOWNOW and and Super NOWSuper NOW AcctsAccts] ]

Money In The American EconomyMoney In The American Economy

2%2% 50% 48%50% 48%

MM11CompletelyCompletely

LiquidLiquid

$10,818$10,818

WHAT ABOUTWHAT ABOUT CREDIT CARDS? Are They Money?CREDIT CARDS? Are They Money?They are not “plastic money.”not “plastic money.” They do serve as a: 1. medium of exchangemedium of exchange & the 2. credit card statementcredit card statement serves as a unit of accountunit of account. 3. but, they dodo not have a store of valuenot have a store of value.

If the credit card company goes out of business credit card company goes out of business or decides not to honor your cardnot to honor your card, it is worthlessworthless. They are not money not money because they don’t store valuebecause they don’t store value.

WHAT ABOUTWHAT ABOUT Debit CARDS? Are They Money?Debit CARDS? Are They Money?

Debit cards areare moneymoney. They serve as a mediummediumof exchangeof exchange; they serve as a store store of of valuevalue (notan extension of credit); and debit card statementsdebit card statementsserve as a unit of accountunit of account.

Debit CardDebit Card

Money has grown increasingly more abstractmore abstract - from a physical commodityphysical commodity,

- to a piece of paperpiece of paper representing a claim claim on a physical commodityon a physical commodity,

- to a piece of paper of no intrinsic valuepiece of paper of no intrinsic value,

- to an electronic entryelectronic entry representing a claim

on a ppieceiece of of paper paper of noof no intrinsic value intrinsic value.

Our Money Is Growing More AbstractOur Money Is Growing More Abstract

[just a [just a Federal Reserve noteFederal Reserve note]]

The The Value of MoneyValue of Money and and Price LevelPrice Level

The value of moneyvalue of money goes goes in the ooppppoossiittee directionof the general general price levelprice level. Or, the amount a dollar will buyamount a dollar will buy varies iinnvveerrsseellyy with the price levelprice level.

Value of MoneyValue of Money PricesPrices

1. 1. Discount RateDiscount Rate – banks borrow from the Fed (symbolic)

2. 2. Required ReserveRequired Reserve - % of DD which cannot be loaned.3. BuyBuy//SellSell BondsBonds – government debt

- 3 mo., 6 mo., & 1 year; purchase price: $10,000$10,000

- 2 yr., 3 yr., 5 yr.,($5,000)($5,000), & 10 yr., ($10,000)($10,000)

- 30 years with purchase of $1,000$1,000

Prime RatePrime Rate – loan rate to the bestbest (primeprime) customersFederal Funds Target RateFederal Funds Target Rate – banks borrow from one another

RecessionRecession

LowerLowerLowerLowerBuyBuy

InflationInflationRaiseRaiseRaiseRaiseSellSell

YYRR YY**

ADAD

ASASLRASLRAS

ASASADAD

YY**YYII

3 Tools 3 Tools of of Monetary PolicyMonetary Policy

MMay 10, 2006ay 10, 2006 [5.0%] [5.0%]

11 decreases11 decreases

16 increases16 increases

AD

AD

YYRR Real GDPReal GDP

DDMM

InvestmentDemand

No

min

al I

nte

rest

Rat

e

10

8

6

0Money MarketMoney Market QQIID1D1

“ “Easy Money” During RecessionsEasy Money” During RecessionsMSMS11

ASADAD11

P1

10

8

6

0

MSMS22

P2

Pri

ce l

eve

l

BuyBuy

If there isIf there is RECESSIONRECESSIONMS will beMS will beincreasedincreased..

QQIID2D2

DDII

Y*Y*

““Easy Money” Easy Money” – – ((Buy/Sell) Buy/Sell) bonds,bonds,whichwhich (increase/decrease)(increase/decrease) MS, MS, which which (increase/decrease) interest rates, (increase/decrease) interest rates, which (appreciate/depreciate)which (appreciate/depreciate)the the dollar, dollar, whichwhich (increase/decrease)(increase/decrease)C, C, IIg,g, & & Xn, Xn, which which (increase/decrease(increase/decrease))AD & therefore, PL, GDP, & emp. AD & therefore, PL, GDP, & emp. EE11

EE22

ADAD22LRASLRAS

““Students, should the Fed Students, should the Fed buybuy or or sell sell bonds to bonds to jumpstart this economy?”jumpstart this economy?”

DDII

ADAD11

YYII

DDmm

InvestmentInvestmentDemandDemand

Nom

inal In

tere

st

Rate

10

88

6

00Money MarketMoney MarketQIDQID2 2 ASAS

10

8

6

0

PP22

MSMS11

PP11

MSMS22

If there isIf there isINFLATIONINFLATION,,MS will beMS will bedecreased.decreased.

SellSell

QIDQID11

YY**

““Tight Money” during InflationTight Money” during Inflation

““Tight Money”Tight Money” – (Buy/Sell) – (Buy/Sell)bonds, bonds, whichwhich (incr/decr) the MS,(incr/decr) the MS,whichwhich (incr/decr) in. rates, (incr/decr) in. rates, whichwhich (apprec/deprec) the dollar,(apprec/deprec) the dollar,which (incr/decr) C, Ig, & Xn,which (incr/decr) C, Ig, & Xn,whichwhich (incr/decr) AD, PL, (incr/decr) AD, PL,&& GDP. GDP.

EE11

EE22

ADAD22

““Now, should Now, should I I buybuy or or sellsell?”?”

LRASLRAS

TransactionsTransactionsDemand, DDemand, Dtt

Mortgage/rentUtilitiesGasFoodEmergency money

Valentine candy for wifewifeTuition for kidsChristmas gifts

New car for the girlfriendgirlfriend

M1M1M1M1

Independent ofinterest rate

Direct withNominal Y

Medium ofExchange

We keep this transaction money(M1)We keep this transaction money(M1)in our wallet, under our mattress, orin our wallet, under our mattress, orin our checking accounts.in our checking accounts.

Demand For Money [Demand For Money [Demand forDemand for “cash in hand”] “cash in hand”]For Daily, Weekly, For Daily, Weekly, && Monthly Transactions Monthly Transactions

No

min

al

Inte

res

t R

ate

Money demanded(bil.)

Dt

10

7.5

5

2.5

00 50 100100 150 200 250 300

No

min

al I

nte

res

t R

ate

Amount of money demanded(billions of dollars)

0 50 100 150 200200 250 300

10

7.5

55

2.5

0

DDmm

EE

MSMS

THE MONEY MARKETTHE MONEY MARKET[at [at “E”“E”,, money supplied ($200) = money demanded ($200)] money supplied ($200) = money demanded ($200)]

Suppose the moneysupply is increasedincreasedfrom $200 billion$200 billion, to $250 billion$250 billion.

Money MarketMoney Market

The Dm curve represents the quantity of money people are willing to hold at various interest rates.

At any other I.R., the quantity of money people desire to holddoes not equal the quantity available.

No

min

al I

nte

res

t R

ate

Amount of money demanded(billions of dollars)

0 50 100 150 200200 250250 300

10

7.5

55

2.52.5

DDmm

EE

MSMS1 MSMS2

THE MONEY MARKETTHE MONEY MARKET[at [at “E”“E”, money supplied , money supplied ($200)($200) = money demanded = money demanded ($200)]($200)]

A temporary surplus ofsurplus of $50 billion$50 billion beyond which the people wish to hold, so money becomes a ““hot potato”hot potato”.

They react by buyingbuying bondsbonds, which pushespushes bond prices upbond prices up, and the interest rate fallsinterest rate falls[because banks have[because banks havemore money] to 2.5%more money] to 2.5%..

Money MarketMoney Market

No

min

al I

nte

res

t R

ate

Amount of money demanded(billions of dollars)

0 50 100 150 200200 250 300

10

7.5

55

2.5

DDmm

EE

MSMS

THE MONEY MARKETTHE MONEY MARKET[at [at “E”“E”, money supplied , money supplied ($200)($200) = money demanded = money demanded ($200)]($200)]

Suppose the moneysupply is decreasedfrom $200 billion$200 billion,, to $150 billion$150 billion.

Money MarketMoney Market

No

min

al In

tere

st R

ate

No

min

al In

tere

st R

ate

Amount of money demandedAmount of money demanded(billions of dollars)(billions of dollars)

0 50 100 0 50 100 150 200150 200 250 300 250 300

10

7.57.5

55

2.5

DDmm

EE

MSMS11

A temporary shortageshortage of of $50 $50 billionbillion will result in thesalesale of of bonds bybonds by householders and businesses to get $50 billion more.

MSMS11

THE MONEY MARKETTHE MONEY MARKET

The $50 bil. shortage disappears when people sell $50 bil. worth sell $50 bil. worth ofof bonds. Bondbonds. Bond prices fallprices fall, & the interest rate interest rate increases increases [because banks have less $] [because banks have less $] to 7.5%to 7.5%.

Money MarketMoney Market

CommercialCommercial BankBank//ThriftThrift FailuresFailures

Cost of Bank/Thrift FailuresCost of Bank/Thrift Failures

The Federal Reserve - 1913The Federal Reserve - 1913

The Fed’s 25 BranchesThe Fed’s 25 Branches

Quasi-Public BanksQuasi-Public Banks ..

QuasiQuasi (in combination)-PublicPublic BanksBanks mean:Blend of [private ownership (corporations) but public (government) control]The 12 banks12 banks are instruments of the government but not owned by the government. The overover 5,000 banks5,000 banks in the 12 districts buy stock (($1$1 per shareper share)) in their district bank (& get 6% dividends6% dividends [no capital gains]) so the banks are privately owned. Serving the public, it is owned by citizensowned 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 billion30 billion - 95% to Treasury.

The Fed’s 25 BranchesThe Fed’s 25 Branches

FEDFED

First Dallas Fed [1921] at Akard and WoodFirst Dallas Fed [1921] at Akard and Wood

Current Dallas Fed at 2200 N. PearlCurrent Dallas Fed at 2200 N. Pearl

Richard FisherRichard Fisher - President ofDallas Fed. Majored in economicsat Harvard

Four Part Structure of the FedFour Part Structure of the Fed1.1. Seven Board of GovernorsSeven Board of Governors - most important body of the Fed - appointed by the Presidentappointed by the President and confirmed by the Senate - 14-year terms14-year terms are staggered (one replaced each two years) [they are paid $162,100paid $162,100] - isolation isolation from from political political pressurepressure (only one 14 year term) - the ChairmanChairman serves only fourfour yearsyears but can be reappointed [4-year renewable4-year renewable termterm] His pay is $180,100$180,100.

Every president gets to appoint at least 2. Clinton appointed 8Clinton appointed 8 & Bush Bush appointedappointed 4 4 in 1st 2 years.

2. Federal Open Market Committee Federal Open Market Committee [FOMC][FOMC]-Fed’s main policy-making arm

-includes 7 board of governors, NY Fed President, & 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 made 34 billion in 2000 (90% goes to the Treasury)

TheThe FOMC Meeting RoomFOMC Meeting Room inin Washington DCWashington DCThe FOMC meets around a 27-foot oval mahogany table27-foot oval mahogany table in a room

with a 23-foot ceiling23-foot ceiling with a 1,000-pound chandelier1,000-pound chandelier.

3. 3. Twelve Feb Banks and 25 BranchesTwelve Feb Banks and 25 Branches

4.4. Several Thousand Member BanksSeveral Thousand Member Banks

Functions of the FedFunctions of the Fed

Refund Check

Destroy/Issue paper notesDestroy/Issue paper notes

The Fed clears 40%;The Fed clears 40%;Banks clear rest electronically.Banks clear rest electronically.

Margin CallsMargin Calls [went from 65% to 50% in 1974][went from 65% to 50% in 1974]

Let’s say you buy 100 shares of Microsoft stock at $100buy 100 shares of Microsoft stock at $100 aa shareshare which would cost $10,000cost $10,000. You only buy 50 sharesbuy 50 shares with cash ($5,000)with cash ($5,000) and buy 50 shares on margin at 10%buy 50 shares on margin at 10% (so, you owe $5,500owe $5,500). Your 50 shares worth $5,000 is your Your 50 shares worth $5,000 is your collateral.collateral.

If MicrosoftMicrosoft stock drops to $50 per share stock drops to $50 per share – the 50 shares50 shares you own are worth only $2,500worth only $2,500 (your collateral now will not cover what you owe [$5,500]. So the broker may make a margin call for $3,000margin call for $3,000 & if you can’t pay it he might sellsell your stock for $2,500your stock for $2,500 and tell you that you still owe $3,000 you still owe $3,000 moremore. If you could have paid the $3,000, he may have let you keep your 50 shares.

So market slides can lead to sell-offmarket slides can lead to sell-off.

The Check Clearing ProcessThe Check Clearing Process Roger Econ & Suzie NomicsRoger Econ & Suzie Nomics Roger writes a $1,000 check on his Dallas Bank & sends it to Suzie in L.A.

Suzie & Her Los Angeles BankSuzie & 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 The Los Angeles BankLos Angeles Bank & the & the San Francisco FedSan Francisco Fed Suzie’s 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 and decreases the reserve of the Dallas bank by $1,000.

The The San Francisco FedSan Francisco Fed and and Dallas BankDallas Bank The San Francisco Fed send the check to Roger’s bank in Dallas which reduces his account by $1,000.

FedFed

First Board of Governors, 1914First Board of Governors, 1914

Board of Governors

Alan Greenspan Chairman

Roger Ferguson Vice Chairman

Edward Gramlich

Donald Kohn

Mark Olson [completing another term]

Susan Bias Ben Bernanke,

Chairman 1590 on SAT

Ben Bernanke Believes In Ben Bernanke Believes In “Core”“Core” Inflation TargetingInflation Targeting[Here is How It would Work][Here is How It would Work]

The Fed would choose and publish a targettarget goalgoal for core inflationfor core inflation of–say, 2% 2% a yeara year.

22%%

The Fed publicly estimates how high it expects inflation to be in the coming year. It steers monetary policy to try to hit the targetinflation rate. The Fed, in effect, is an “inflation hawk”“inflation hawk”.

If inflation is getting above the targetabove the target, the bank raises interest bank raises interest rates to cool the economyrates to cool the economy. If inflation is too lowinflation is too low, the Fed Fed would lower interest rates to juice up growthwould lower interest rates to juice up growth..

The “Target Rate”“Target Rate” is used in Britain, Canada, Australia, Sweden,New Zealand, Brazil, and South KoreaSouth Korea, working well in all seven.

In a crisis likecrisis like 9/119/11, the Fed could still do what was necessary to stabilize the economy,that is, lower interest rates further.

EarthquakeEarthquake

NS 14-21NS 14-2114. The transaction demandtransaction demand [buying things] for money is

most closely related to money functioning as a (medium of exchange/store of value).15. The asset demand for moneyasset 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 purposestransaction purposes will be ($200/$300/$400).

17. The DDt t will shift to the rightwill shift to the right as a result of a(n) (increase/decrease) in nominal GDP. The DDtt will will shift to the leftshift to the left as a result of a[n] (increase/decrease) in nominal GDP.

18. The asset demand for moneyasset demand for money varies (directly/inversely) with the interest rate.19. The basic policy-making bodypolicy-making body in the American banking system is

the (Council of Economists/Board of Governors).

20. The FedFed was createdwas created in (1900/1913/1929/2004)

21. Commercial Banks and thriftsCommercial Banks and thrifts, since 1980, have become increasingly (similar/dissimilar).

NS 22-26NS 22-26

22. The transaction demand for moneytransaction demand for money (“walking around” money) is

shown by (D1/D2/D3).

23. The asset demand for moneyasset demand for money (“betting” money) is shown by (D1/D2/3).

24. The total demand for moneytotal demand for money is shown by (D1/D2/D3).

25. If each dollar held for transaction purposeseach dollar held for transaction purposes is spent 4 timesspent 4 times per year,

nominal [money] GDP is ($200/$400/$600/$800).

26. If the Fed increased the MSFed increased the MS, the MS curve would shift (right/left) and the interest rateinterest rate would (rise/fall).

200200 400400200200

5%5% 5%5% 5%5%

MSMS22

NS 27-28NS 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 supplycontrols the money supply..

29. The 12 12 FedFed banks 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”“thrift” includes S&L’s, credit unions, and

(mutual savings banks/ commercial banks).

The EndThe End