Chapter 13 Money _ Banking by chenmeixiu

VIEWS: 28 PAGES: 62

									Monetary Policy
1. Discount Rate
2. Reserve Ratio
3. Bonds




                   Ben Bernanke
There is $800 billion in currency [notes & coins].
                                       [2/3 is overseas]




       Money = paper notes + coins + Demand Deposits
                  [52%]      [2%]       [46%]
                “Anything you can buy
                 a candy bar with”
 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?
   a. Currency (paper dollars-52%)
                (coins-2%)
  b. DD-46%


3. What “backs” the money supply?
  (gold/silver/the faith of the “G”)   .




                                           “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.
Paper notes printed at:   1st-A-Boston (0)         7th-G-Chicago (1)
1. FW Currency Center     2nd-B-New York (1)       8th-H-St. Louis (3)
2. Washington D.C.
                          3rd-C-Philadelphia (0)   9th-I-Minneapolis (1)
Coins minted at:          4th-D-Cleveland (2)      10th-J-Kansas City (3)
1. Denver
2. Philadelphia           5th-E-Richmond (2)       11th-K-Dallas (3)
3. San Francisco
                          6th-F-Atlanta (5)        12th-L-San Francisco (4)
              Bills are crowded with numbers and
              letters that help the U.S. Treasury track
              printing errors & authenticate currency.
              Here’s 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
   First letter corresponds                  circle indicating issuing Fed bank.
   to issuing Fed bank
   New $20 colors are peach, blue, and green.
                      [Jackson’s portrait is larger, free from the oval]
New background
colors add an
extra layer of
complexity for
counterfeiters
Ink appears either
copper or green,
depending upon
the angle at which
the bill is viewed.
                       This is the 20’s 20th new look.
                                                                 The $20 bill is the
The first $20 bill The average $20 bill lasts 3 years.           most counterfeited
was introduced in                                                in the U. S., while
                    There are 5 billion twenties in circulation,
1861. Back then,                                                 the $100 is most
                    enough to circle the earth 19 times. counterfeited abroad.
$20 was about the
monthly wage for     An ATM can hold up to 7,500 bills,
manual laborers.     or $150,000 in twenties.
   $100 Dollar Bill –
  Red Polymer Thread

                  $50 – Yellow


         $20 – Green

        $10 – Orange
Now the “5” screams,   “I am a 5.”
             $5 - Blue
[They were not going to change the $5 note but –
counterfeiters were bleaching Abe & printing Ben on
them as they had similar security features. It has
2 new water marks and purple ink. [no oval]
  No paper notes larger than $100 have been printed since 1946.

There will be another new $100 bill in late 2008. It will combine
micro-printing with tiny lenses – 650,000 for a single bill. The lenses
magnify the micro-printing in a remarkable way.
Move the bill side to side, and the image appears to move up & down.
Move the bill up and down, and the image appears to move from side
to side. It is a very complex optical structure on a microscopic scale.
The government prints 38 million notes each business day with a face
value of $750 million. [70% of the $800 million currency is $100 bills.]
   And – what about the new
“Bush Dollar” coming out next week?




  And the new $1 bill coming out Wednesday?
This phony Bush
$200 bill showed
up at a Kentucky
Dairy Queen.

  The serial #:
DUBYA402001

Ronald Reagan
signed it as
Sec. of Treasury

A man bought a
$2 sundae & got
198.00 in real cash

On some of the
signs were these:

“We like broccoli.”
“We like ice cream.”
“U.S.A. deserves
 a tax cut.”
             Beaver skins [1600’s-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 1770’s.
                  [“Piece of Eight”]
    An average colonial worker earned two bits a week.
 Many of you already understand the history of money.
 Your parents give you money and – it becomes “history”.
            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.
                                                    “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 $5’s, $10’s, & $20’s[total 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.
 Under the gold
 standard, $35 of
 currency could
 be redeemed for
 one ounce of
 gold.
 You could bring
 $35 of bills to the
 U.S. Treasury and
 exchange it for
 an ounce of gold.



Gold Certificates (1865-1933) & Silver Certificates (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 among
Fed banks. Silver certificates had denominations from $1 to $1,000.
   Federal Reserve Notes (1914-Fed was established in 1913)
  Modern coins are produced by mints in Phil., S.F., & Denver. Federal Reserve Notes
make 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
the $1 bill]. In 1929, all notes were reduced by about 1 inch in length and about ½ inch
in width. $500 million of paper money is shredded each day.
   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.
    Barter – goods and services were
traded without the exchange of money.
However, before trade could occur, there had to
be a “double coincidence of wants”. Each trader
had to have something the other wanted.
                              I would love to sell you these
       I’ll trade you a
                              shoes but I can’t eat chicken,
      chicken for a pair
                              due to my bad teeth, caused by
           of shoes.
                              smoking.


           In a barter economy a chicken
           farmer who wants to buy shoes
           may have to first trade chickens
           for apples and then apples for
           shoes because the guy selling
           shoes wants only apples.
           Money eliminates this problem.
 You are lucky you are a
 pineapple farmer and not a
 broccoli farmer. I hate broccoli.




Or, a heart surgeon might accept only
certain goods (like pineapples      )
but not others (        like broccoli)
because he doesn’t like broccoli.
It is less expensive to use money.
The “calculation of exchange” is fast and easy
because whatever the price is, you pay that amount.
                              Here’s $3.00
                             for one gallon.




                         .




The “calculation of exchange” by bartering is
much slower than the “calculation of exchange”
in a monetary system.
• It is less expensive to use money.
• Using money saves time and time is money.
The monetary system enables the “calculation
 of exchange” to go much faster.
 • Money is also easier to tax.
 • So a monetary system is better than a
   barter system.
          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]
   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.
       Three FUNCTIONS OF MONEY

                                                            Greek Coin
                                                          2,500 years old



3. Store of Value             [storing wealth from one point in time to another]
[doesn’t 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
• Commodity Money:      something that performs
 the function of money and has alternative, non-
 monetary uses. Gold, silver, cigarettes, corn


                      Alternative uses
                         such as …



• Fiat Money: something that serves as
 money but has no other important uses.
 – Paper notes
 – Coins
Currency + DD equal M1 [Spendable Money]
Also included here would be Travelers checks,             M1 M2            M3
Checklike deposits [NOW and Super NOW Accts]
      M1
  Completely                                              $1,375
    Liquid                                               [billions]
                 2%        52%                46%
M1 + savings deposits, small TDs [like CDs &
bonds] under $100,000, & MMFs for individuals=          M2
M2 + large institutional savings = M3

“V” – how many times a dollar changes hands in a year            $6,758
                                                                          $6,934
                                                                          [Billions]
V = GDP[Y]/M1 = 13 tr./1.3 tr. = 10
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 don’t store value.
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
      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.
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 Kroger’s 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 FSU at $16,001 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, MMA’s & 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).
            1. Discount Rate – banks borrow from the Fed (symbolic)
Recession   2. Required Reserve - % of DD which cannot be loaned.      Inflation
Lower       3. Buy/Sell Bonds – government debt                        Raise
Lower                                                                  Raise
                     - 3 mo., 6 mo., & 1 year; purchase price: $10,000 Sell
Buy
           AS                                                                     AD AS
   LRAS              - 2 yr., 3 yr., 5 yr.,($5,000), & 10 yr., ($10,000)     AD
 AD
                     - 30 years with purchase of $1,000
       AD
                     Prime Rate-loan rate to the best (prime) customers.          Y*YI
   YR Y*
            Federal Funds Target Rate – overnight lending rate between
                    banks to correct a temporary imbalance in reserves.


                               Real GDP 2.3%
                                                                      17 increases
                                     4%
“Students, should the Fed
buy or sell bonds to                                        MS1 MS2
jumpstart this economy?”                                                                     DI
                                                                                                   Investment

                       Nominal Interest Rate
                                               10                                  10               Demand

                                               8                                    8

                                               6
                                                                   Buy
                                                                                    6

                                               0
                                                                              DM
If there is                                                                         0
                                                            Money Market                       QID1 QID2
RECESSION                                           AD1      AD2 LRAS
MS will be                                           [C+Ig+G+Xn]         AS “Easy Money” – (Buy/Sell) bonds,
increased.                                                                  which (increase/decrease) MS, which
                Price level




Jobs are                                                                    (increase/decrease) interest rates,
tough to get.                                                               which (appreciate/depreciate)
                                                                            the dollar, which (increase/decrease)
                                                                         E2 C, Ig, & Xn, which (increase/decrease)
                               P2
                               P1                           E1              AD & therefore, PL, GDP, & emp.


                                                               YR Y*       Real GDP
“Now, should I
buy or sell?”
                                                  Dm    MS2 MS1                    DI


                   Nominal Interest Rate
                                           10                             10
                                                                               Investment
                                           8                                     Demand
                                                                           8

                                           6
                                                                           6
                                                            Sell
If there is                                0
                                                Money Market               0
INFLATION,                                                                                  QID2 QID1
                                                         LRAS   AS
MS will be
decreased.                                           AD2                “Tight Money” – (Buy/Sell)
                                                                        bonds, which (incr/decr) the MS,
“I’ll get rid of                      P1                           E1
                                                                        which (incr/decr) in. rates, which
some money.”
                                                                        (apprec/deprec) the dollar,
                                                                        which (incr/decr) C, Ig, & Xn,
                                       P2
                                                                        which (incr/decr) AD, PL, & GDP.
                                                           E2
                                                                         AD1

                                                           Y* YI
                          THE Total DEMAND FOR MONEY
                               Transactions                                                    Asset
                               Demand, Dt                                          +         Demand, Da = store          Total demand
                                                                                                                         for money, Dm
“Walking around”                                                                                   Da [M2]           –       of value money
    money                                                                                          Money that we don’t need for daily, weekly,
                               M1                Rate of interest, i (percent)
                                                                                                   or monthly transactions. We will invest more
                         10                                                      10
                                                                                                   of it the higher the interest rate. We will hold
 Nominal Interest Rate




                                      Dt
                         7.5
                                 Independent
                                                                                 7.5               less because the opportunity cost increases.
                                     of the                                       5
                                                                                                                            10% Da
                          5                                                                                                              “I’m losing more
                                    interest                                                                 Interest Rate               interest, the
                                      rate                                       2.5   CDs or                                   8%       higher the I.R.”
                         2.5
                                 Dt                                                                Da        Opportunity Cost
                          0                      0                                                                              6%
                         0 50 100 150 200 250 300 0 50 100 150 200 250
                                                                                                             Da [hold less]     5%
                           Amount of money                                             Amount of money
                           demanded (billions)                                         demanded (billions)                      4%
                                                                                                             Interest Rate
                                           Da varies inversely Opportunity Cost                                                 2%
                                           with the interest rate.                                                              1%
                                                                                                             Da [hold more]     0
                                                                                                                                     0 50 100 150 200
THE DEMAND FOR MONEY
                          Transactions
                           Demand, Dt
                          [independent]
                                                +                                       Asset
                                                                                     Demand, Da
                                                                                      [inverse]
                                                                                                        =                                          Total demand
                                                                                                                                                   for money, Dm

                                  M




                                                                                                                   Rate of interest, i (percent)
                                                    Rate of interest, i (percent)
                         10                                                         10                                                             10
                                                                                                               10%
 Nominal Interest Rate




                         7.5                                                        7.5                                                            7.5

                                                                                                               7.5%
                                                                                                                                                    5
                          5                                                          5
                                                                                                               5%
                                                                                                                                                   2.5
                         2.5                                                        2.5
                                                                                                               2.5%                                                       Dm
                                      Dt                                                              Da                                            0

                          0                                                          0                                        0
                               50 100 150 200 250 300                                     50 100 150 200 250 300                                     0 50 100 150 200 250 300
                               Amount of money                                             Amount of money                                                Amount of money
                               demanded (billions                                         demanded (billions                                             demanded (billions
                                  of dollars)                                                of dollars)                                                    of dollars)
                                           Transactions
                                            Demand, Dt       +                                      Asset
                                                                                                  Demand, Da          =                                       Total demand
                                                                                                                                                              for money, Dm

                                             MS                                                                                                                     MS2 MS1




                                                                                                                             Rate of interest, i (percent)
                                                                 Rate of interest, i (percent)
                                       10                                                        10                                                          10
               Nominal Interest Rate




                                       7.5                                                       7.5                                                         7.5


                                       5                                                          5                                                          55            E

                                       2.5                                                       2.5                                                         2.5
                                                 Dt                                                                Da                                                             Dm
                                                                                                                            0
                                       0 50 100 150 200 250 300                                    0 50 100 150 200 250 300 0 50 100 150 200 250 300
                                            Amount of money                                             Amount of money                                            Money market
                                           demanded [billions]                                         demanded [billions]
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.
[at “E”, money supplied ($200) = money demanded ($200)]
    The Dm curve represents the quantity of money
    people are willing to hold at various interest rates.

              Nominal Interest Rate
                                      7.5
                                                     DmMS

                                       5                     E

                                      2.5


                                       0    50   100 150   200   250 300
                      Money Market
       Due to a recession, suppose the money supply
       is increased from $200 billion to $250 billion.
                 [at “E”, money supplied ($200) = money demanded ($200)]
                                                                                  A temporary surplus of
                                                                                  $50 billion beyond which
                    S2 S 1                                                 MS1MS2 the people wish to hold,
                                                        10
Price of Bonds




                                                                                     so money becomes a
                                Nominal Interest Rate
             P2
                                                                         Dm          “hot potato”.
                                                        7.5
             P1
                                                                                     They react by buying
                                                         5                     E     bonds [pushing bond
                   # of Bonds
                                                                                     prices up] to meet the
                                                        2.5                        E desired level of liquidity.


                                                          0   50   100   150 200 250 300
                                                               Money Market
                                                                         MS1 MS2


                              Nominal Interest Rate
                  LRAS SRAS

     AD AD                                                     Dm
PL

      YD              GDP


                                                                           E
                            1%

                                                      0   Money Market   500

     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.
[at “E”, money supplied ($200) = money demanded ($200)]
    Due to inflation, suppose the money supply is
    decreased from $200 billion to $150 billion.

                                                           Dm MS
                                     7.5
             Nominal Interest Rate



                                      5                          E

                                     2.5


                                           0    50   100   150 200   250 300
                                               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.
                               MS

                                 Nominal Interest Rate
        S1 S 2               Dm 2 MS1                    10
Price of Bonds




             P1
                                                         7.5
             P2

                                                          5                         E
                  # of T-bills




                                                              0   50    100   150 200   250 300
                                                                       Money Market
1. [3 pts] Assume that declining stock market prices in the U.S. cause many
   U.S. financial investors to sell their stocks and increase their money holdings.
   (a) Draw a correctly labeled graph of the money market and show the
        impact of the financial investors’ actions on each of the following.
        (i) Demand for money
        (ii) Nominal interest rate                  DM MS




                                              Nominal Interest Rate
                                                 DM 2
Answers for 1. (a) (i) [2 points]
                                            r2   1
1. (a) (i) In an effort to preserve wealth,
  investors sell off stocks when market
  prices begin to decline. These new
                                                                      r1
  money holdings will increase the
  asset [speculative] demand for money.
                                                                           M   Quantity of Money
                                           Tutorial: These will shift the real Dm curve.
  In the volatile market, investors will   1. Changes in real aggregate spending,
  hold more money while determining        2. Advances in banking technology. [ATMs available
                                              24/7 decrease the need for cash (Dm)]
  future needs. [2 pts: 1 pt for correct   3. Change s in institutions [ability to get interest on
  graph and 1 pt for Dm shifting right.]      checking accounts lead to an increase in Dm],
                                           4. Riskiness of alternative stores of value [stocks].
                                              Dm increases when stocks are appealing.
Answers for 1. (a) (ii) [1 point for saying the interest rate increases]
1. (a) (ii) The nominal interest rate would increase because the demand
   for money increases as the DM curve shifts up, as shown above.
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
1st-A-Boston (0)        7th-G-Chicago (1)
2nd-B-New York (1) 8th-H-St. Louis (3)
3 rd-C-Philadelphia (0) 9th-I-Minneapolis (1)

4th-D-Cleveland (2) 10th-J-Kansas City (3)
5th-E-Richmond (2) 11th-K-Dallas (3)
6 th-F-Atlanta (5)      12th-L-San Francisco (4)
 The Fed’s 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.
       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 8
  & Bush appointed 4 in 1st 2 years.
 One term begins every 2 years on Feb. 1 of even numbered years.
2. Federal Open Market Committee [FOMC]
-Fed’s 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)
   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.




              Home of 7 Board of Governors
                                      .




• Typical Meeting
• The entire committee [12 members + other 8 bank presidents] examine
  regional, national and international economic info to assess the
  strengths and weaknesses of the economy.
• After discussing the economy, the voting members vote on the
  direction of monetary policy. A policy directive describes the committee’s
  assessment of the economy and the new target fed funds rate.
• An announcement is made about 1:15 p.m.
3. Twelve Fed Banks and 25 Branches
4. Thousands of Member Banks




   1st-A-Boston (0)        7th-G-Chicago (1)
   2nd-B-New York (1) 8th-H-St. Louis (3)
   3 rd-C-Philadelphia (0) 9th-I-Minneapolis (1)

   4th-D-Cleveland (2) 10th-J-Kansas City (3)
   5th-E-Richmond (2) 11th-K-Dallas (3)
   6 th-F-Atlanta (5)      12th-L-San Francisco (4)
                                   Destroy/Issue paper notes




         The Fed clears 40%;
Banks clear rest electronically.
             Cash Services
  Check                      Electronic
Processing                   Payments
 Store cash and coin
 Maintain currency’s quality
 Detect counterfeits
The Fed handled 42
 billion electronic
 transactions in 2006
 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 of–say, 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
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 Dm will shift to the right as a result of a(n)
    (increase/decrease) in nominal GDP. The Dm will
    shift to the left as a result of a[n] (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).
                                                                    MS2

   5%                    5%                    5%



           200                                         200    400


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).
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 S&L’s, credit unions, and
   (mutual savings banks/ commercial banks).
The End

								
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