Money and Banking and the Role of the Federal Reserve

Money and Banking

Money

• Transactional vehicle• Money is any item or

verifiable record that is generally accepted as payment for goods and services and repayment of debts.

• The main functions of money are distinguished as: – a medium of exchange – a store of value

• Any item or verifiable record that fulfills these functions can be considered money.

Gold Standard

• A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold.

Bi Metal Standard

• bimetallism is a monetary standard in which the value of the monetary unit is defined as equivalent both to a certain quantity of gold and to a certain quantity of silver;

• such a system establishes a fixed rate of exchange between the two metals. The defining characteristics of bimetallism are[

• Both gold and silver money are legal tender

• The government will convert both gold and silver into legal tender coins at a fixed rate for individuals in unlimited quantities. This is called free coinage because the quantity is unlimited, even if a fee is charged.

Fiat Currency

Banking

• Bank Architecture

• Safety

• Security

• Stability

• Earn Interest

• Checking

Demand Deposits

• Access to your money at any time

• Disingenuous on the part of bankers

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Fractional Banking System

• Reserve Ratio

• Debt to Equity Ratio

Bank Balance Sheet

Multiplier Effect

• The expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends on the percentage of deposits that banks are required to hold as reserves. In other words, it is money used to create more money and is calculated by dividing total bank deposits by the reserve requirement.

Inflation & Recession

Liquidity

• In banking, liquidity is the ability to meet obligations when they come due without incurring unacceptable losses.

Solvency

• Solvency, in finance or business, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity.

Leverage

FDIC

• Insurance on bank accounts

• Promotes risk

• A government subsidy that allows bankers to arbitrage yield curve

Central Bank

Federal Reserve

• Target Rate

• Fed Funds Rate

Open Market Operations

Supply & Demand

Tools of the Fed

• Open Market Operation

• Fed Funds Window

• Repo agreements

Fed Chairs

Fed Chairs

U.S. Treasury Department

• Bills

• Notes

• Bonds

Yield Curve

• A yield curve in which short-term debt instruments have a lower yield than long-term debt instruments of the same credit quality.

Fiat Money

• U.S. Currency

• Issued by Fed but obligation of U.S. government

Money Supply

• M0 and M1

Relationship between Money Supply and Interest Rates