The Monetary System

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Medium of exchange

Back 1

item that buyers give to sellers when they want to purchase goods and services: anything readily acceptable as payment

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Unit of account

Back 2

yardstick people use to post prices and record debts

Front 3

store of value

Back 3

item that people can use to transfer purchasing power from the present to the future

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Federal reserve

Back 4

nations central bank

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Federal reserve 2

Back 5

oversee banking system & regulate quantity of money

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Structure of Federal reserve system

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1. Board of governors
2. Regional Federal Reserve Banks
3. Federal Open Market Committee

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3 Primary functions of fed

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1.Regulates banks
2. Act as a bankers bank
3. Conduct monetary policy

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Regulate Banks

Back 8

ensures banks follow federal laws intended to promote safe and sound banking practices

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Banker's Bank

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Making loans to banks and as a lender of last resort

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Conduct Monetary Policy

Back 10

Controls the money supply

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Federal Open Market Committee (FOMC)

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Serves as main policy making organ of fed system

Meets approx. every 6 weeks to review economy and set interest rates

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Monetary Policy

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Conducted by federal Open Market Committe (FOMC)

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Monetary Policy

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Is the seetting of the money supply by plicymakers in the central bank

money supply refers to the quantity of money available in economy

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Bankss

Back 14

Can influence the quanity of demand deposits in the economy and the mony supply

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Reservees

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Deposits that banks have received but not loaned out

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Fractional Reserve banking system

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banks hold a fraction of the money deposited as reserves and lend out the rest.

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Reserve Ratio

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ratio fraction of deposits that banks holdas reserves.

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Money Supply

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Increased when banks make a lona from its reserves

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Money Supply

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Affected by the amount deposited in banks and amount banks loan

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Loans

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assets to bank

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Deposits

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In a bank they are recorded as both assets and liabilities

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Money Multiplier

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amount of money the banking system generates with each dollar of reserves

M= 1/R

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Monetary Toolbox

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1.Open Market Operations
2> Changing reserve requirement
3. Changing discount rate

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Open market

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Primary tool

Buying and selling government bonds to public.

Feds buy: money supplyincreases
Feds sell: money supply decerases

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Reserve Requirements

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Fed also influence

regulations on minimum amount of rserves that banks must hold against deposits

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Changing Resrve Requirement

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Amount (%) of a bank's total reesrves that may not be loaned out.

increaseing reserve: decreases money supply- banks have less to lend

decreasing reserve: increases money supply

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Discount Rate

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Interest rate the fed charges banks for loans.

Increasing rate: decreases money supply

Decreasing rate: incnrenases money supply since it is now less expensive for banks

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Problems With Money Supply

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Fed's control of money supply is not precise

Fed must wrestle with two problems due to fractional reserve banking
1. Fed does not control amount of money households choose to hold as deposits in banks
2. Fes do not control amount of money that bankers choose to lend.

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Financial Markets

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institutions where savers can directly provided funds to borrowers; stock market and bond market

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Financial Intermediaries

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savers can indirectly provide funds to borrowers; banks and mutual funds

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Financial system

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group of institutions in economy that help to match one person's saving with another person's investment

moves economy's scarce resourses from savers to borrowers

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National Savings

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total income in the economy taht remains after paying for consumption and government purchases

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Private Saving

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amount of income that households have left after paying their taxes and paying

y-t-g

their consumption

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Public savings

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amount of tax revenue that the government has left after paying for its spending

t-g

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Budget surplus

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T>G

because it receives more money than it spends

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Budget Deficit

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G>T

because it spends more money than it receives in tax revenue

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Market for loanable funds

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market which those who want to save supply funds and those who want to borrow to invest demand funds

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Loanable funds

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refers to all income that people have chosen to save and lend out, rather than use for their own consumption

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Supply of loanable funds

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Comes from what people who have extra income they want to save and lend out

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Demand for loanable funds

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Comes from households and firms that wish to borrow to make investments

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Interest rate

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price of the loan what borrowers pay nad what lenders receive

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Policies that affect saving and investment

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taxes and saving
taxes and investmen
governemtn budgetdeficits

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Saving Incentives

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tax decrease increases households to save at any given interest rate

supply curve: shifts right
Quantity Demanded: incrases
Equilibrium:decreases

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Investment Incentives

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Tax credit incernases reason to borrow.
Demand curve: shifts right
Demand: Increases
Results: higher interest rate and greater quantity saved

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Budget deficit

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government spends more than it receives in tax revenues

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Debt

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accumulation of past budget deficits

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Government borrowing

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reduces the supply of loanable funds available to finance investment by housholds nafirms

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Crowding out

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deficit borrowing crowds out private borrowers who are trying to finance investments

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Budget Deficit

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Decreases suppply of loanable funds.

shifts supply curve left
increases queilibrium rate
reduces quantity of loanable funds.