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Money and the Economy
Target: I can explain the role the Federal Reserve plays in the
economy.
The Role of Banks
Banks are a business out to make a profit
The Role of Banks
Banks are a business out to make a profit
This is why the government must regulate them
The Role of Banks
Banks are a business out to make a profit
This is why the government must regulate them Banks would act in a pro-cyclical manner if
left unchecked
The Role of Banks
Banks are a business out to make a profit
This is why the government must regulate them Banks would act in a pro-cyclical manner if
left unchecked When the economy is doing good they would
continue to increase the prosperity by offering even more loans
The Role of Banks
Banks are a business out to make a profit
This is why the government must regulate them Banks would act in a pro-cyclical manner if
left unchecked When the economy is doing good they would
continue to increase the prosperity by offering even more loans
This is bad b/c it would cause inflation and collapse the economy
Banks would act in a pro-cyclical manner if left unchecked
On the other hand, in bad times, banks would reduce the # of loans
Banks would act in a pro-cyclical manner if left unchecked
On the other hand, in bad times, banks would reduce the # of loans
The means that we may not get out of a recession
Banks would act in a pro-cyclical manner if left unchecked
On the other hand, in bad times, banks would reduce the # of loans
The means that we may not get out of a recession
All of this means that the government must act in a counter cyclical manner!
Banks Expand Money
A bank has a reserve requirement
Banks Expand Money
A bank has a reserve requirement Generally this requirement is 10%, meaning
they must have 10% of the assets that they loan out
Banks Expand Money
A bank has a reserve requirement Generally this requirement is 10%, meaning
they must have 10% of the assets that they loan out
Ex. – IF they loan a $1000, they must keep $100 on hand
Banks Expand Money
A bank has a reserve requirement Generally this requirement is 10%, meaning
they must have 10% of the assets that they loan out
Ex. – IF they loan a $1000, they must keep $100 on hand
They can do this b/c the loaned $ will be spent, and the seller will place the $ back into a bank
FDIC
After people lost their $ in bank accounts during the Depression, the gov’t began to insure accounts
FDIC
After people lost their $ in bank accounts during the Depression, the gov’t began to insure accounts
The Federal Deposit Insurance Corporation will insure each deposit up to $250,000
The Federal Reserve
The Fed oversees banking within the country
The Federal Reserve
The Fed oversees banking within the country
Their most important job is to maintain a stable supply of $
3 Ways to maintain stable supply
1) Reserve Requirement – the fed can change the amount of $ banks must keep on reserve, thus changing the amount of $ in circulation
3 Ways to maintain stable supply
2) Discount Rate – the Fed loans money to banks, it can change the interest rate charged to the banks, thus changing the amount of $ in circulation
3 Ways to maintain stable supply
3) Open Market Operations – change the amount of securities that they buy/sell
3 Ways to maintain stable supply
3) Open Market Operations – change the amount of securities that they buy/sell Ex. – if they sell securities, they are taking $
out of the system
3 Ways to maintain stable supply
3) Open Market Operations – change the amount of securities that they buy/sell Ex. – if they sell securities, they are taking $
out of the system Ex. – if they buy securities, they are increasing
the amount of $ in the system
3 Ways to maintain stable supply
3) Open Market Operations – change the amount of securities that they buy/sell Ex. – if they sell securities, they are taking $
out of the system Ex. – if they buy securities, they are increasing
the amount of $ in the system It is open to debate on the effect the Fed has
had on the economy
