Econ 1202 1st Edition Lecture 19 Outline of Lecture 18 (Framework of Aggregate Demand and Supply (continued)/Money and Banking)I. Why Inflation?II. Other Macroeconomic TheoriesIII. MoneyIV. A World Without Money: The Barter EconomyV. The Functions of MoneyVI. Types of MoneyVII. Money in the U.S. Economy: The Terms Used Outline of Lecture 19 (Money and Banking (continued))I. Macroeconomic “M and M’s”II. How is Money Measured in the U.S?III. Show Me the MoneyIV. Generally SpeakingV. Other “Bits” of MoneyVI. The Banking System: Commercial Banks, The Fed, and UsVII. Commercial Banks: The “Webster and Liberty Banks” of the U.S. WorldVIII. “Deep in the Rust Belt, Regional Banks Fill Industrial Niche”IX. Federal Reserve SystemX. Organization of the Federal Reserve SystemXI. Board of GovernorsXII. Regional Banks (The Commercial Bank’s Bank)XIII. Federal Open Market Committee (FOMC)XIV. What is the Fed’s Job?XV. What is U.S. Monetary Policy?XVI. Tools of Monetary PolicyXVII. Open Market OperationsXVIII. Discount Rate policy: A Tale of Two RatesXIX. Reserve Requirements: First Some BackgroundsXX. Reserve Requirements: A More Theoretical, Less Practical ToolXXI. Where are the Reserves Kept?Money and Banking (continued)XXII. Macroeconomic “M and M’s”a. Measures of the “money stock”i. M11. Demand deposits, traveler’s checks2. Other checkable deposits, currencyii. M21. Everything in M12. Savings deposits, small time deposits3. Money market mutual funds4. A few minor categoriesXXIII. How is Money Measured in the U.S?a. There is M1 (narrowest definition of money), which includes currency andchecking accountsb. There is also M2 (a broader definition of money) which is M1 plus savings accounts, small denomination certificates of deposits and money market deposit accountsXXIV. Show Me the Moneya. Much of our currency is held abroadb. Currency is also held by drug dealers, tax evaders, and other criminalsc. Currency is not a particularly good way to hold wealthi. It can be lost or stolen and it doesn’t earn interestXXV. Generally Speakinga. When we talk about the money supply, we typically are referring to M1 inthis class because we are interested in money’s role as the medium of exchangeb. For the most part, when we talk of money, we are talking about currency and checking account balances as “money”, but nothing elseXXVI. Other “Bits” of Moneya. Credit cards are notb. Debit cards arec. E-money such as Pay-Pal and Bit-Coinsi. Bit-Coins-a new form of e-money, owned not by a government or firm, but a product of a decentralized system of linked computers1. Can be traded for other currencies on websites and some websites accept Bit-Coins as a form of paymentXXVII. The Banking System: Commercial Banks, The Fed, and Usa. When we think of money, we typically think of currency issued by a government (coins, bills), however, currency is only a small part of the money supplyb. There is more money held in checking accounts than there is actual currency in the economy.c. So, somehow, money is being created by banksXXVIII. Commercial Banks: The “Webster and Liberty Banks” of the U.S. Worlda. Financial Intermediary-a “middleman” between those that have a surplus of funds to those that have a shortage of fundsb. They provide a nexus (not the only one) between the savers and borrowers in an economyc. Largest type of depositary institution is the institutions that accept deposits from individuals and other institutions and make loansd. Commercial banks get their money from us through accepting checking account, saving, and time deposits (technically it is called “issuing” checking account, savings, and time deposits)i. Checking accounts and savings accounts are payable on demand (with saving accountsii. Time deposits (like certificate deposits) have a fixed maturity1. They take these funds and make loans and buy U.S. government (state and municipal) bondse. Approximately 5,700 banksf. Around $12 trillion in assetsg. What are investment banks?i. They aren’t really banks at all, or at least, not a bank in the ordinary senseii. They assist companies in the insurance of corporate bonds and stock (securities)iii. They assist in the sale of these securities (underwriting) by agreeing to buy the securities offered at a predetermined price and then reselling in the financial marketXXIX. “Deep in the Rust Belt, Regional Banks Fill Industrial Niche”a. Commercial banks and the specialization of industrial loans by regional banks at least relative to large national banksb. Lending more to the manufacturing heartland (auto components, specialty chemicals, advanced manufacturingc. Borrowers are purchasing equipment that use new and advanced technologiesd. It is important because lending is allowing for greater I (AD), I is increasingthe K stock allowing the implementation of technological change which impacts the SRAS and LRASXXX. Federal Reserve Systema. The Federal Reserve (the Fed)i. The “central bank” of the U.S.ii. Like the European Central Bank or Bank of Englandb. What is a Central Bank?i. An institution designed to:1. Oversee the banking system2. Regulate the quantity of money in the economyc. Fed Historyi. It was created in 1913 after a series of bank failures in 1907ii. The Fed was substantially restructures into its current organizational structure in the 1930’siii. During the great Depression, many banks were hit by bank runsiv. Many were (and still are) critical of the Fed’s decisions in the early 1930’s, believing they made the Great Depression worseXXXI. Organization of the Federal Reserve Systema. Board of Governorsb. Regional Banksc. Federal Open Market Committee (FOMC)XXXII. Board of Governorsa. Top of the pyramidb. 7 members with 14-year termsi. These members are appointed by the president and confirmed by the Senatec. The chairperson is appointed under a 4-year renewable termi. Directs the Fed staffii. Presides over board meetingiii. Testifies regularly about Fed policy in front of congressional committeesiv. Appointed by the presidentXXXIII. Regional Banks (The Commercial Bank’s Bank)a. 12 Regional Federal Reserve Banksi. Major cities around the country (Boston, NYC, San Fran, St. Louis)ii. The presidents are chosen by each bank’s board of directorsXXXIV. Federal Open Market Committee (FOMC)a. FOMC is where monetary policy is formulatedb. 7 members of the board of governorsc. 5 of the 12 regional bank presidentsi.