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Mizzou ECONOM 1051 - Money, Banks and the Federal Reserve
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ECON 1051 1nd Edition Lecture 45 Outline of Last Lecture I. The Macroeconomics of Saving and Investment a. The total value of saving in the economy must equal the total value of investmentOutline of Current Lecture I. What is Money/Why Do We Need It?II. How Do Banks Create Money?III. The Federal Reserve System IV. Why Don’t More Low-Income Countries Experience Rapid Growth?Current LectureI. What is Money/Why Do We Need It?a. The Function of Money i. Medium of Exchange1. Money serves as a medium of exchange when sellers are willing toaccept it in exchange for goods and services ii. Unit of Account1. In a barter system, each good has many pricesiii. Store of Value1. Money allows value to be stored easily. If you do not use all your dollars to buy good and services today, you can hold the rest to use in the future. b. How Money is Measuredi. M1 1. Narrowest definition of the money supply2. The sum of currency in circulation, checking account deposits and holdings of traveler’s checksii. M21. Broader definition2. M1 plus savings account balances, small denomination time deposits, balances in money market deposit accounts in banks andnon-institutional money market fund shares. iii. Two Key PointsThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.1. The money supply consists of both currency and checking account deposits 2. Because balances in checking account deposits are included in themoney supply, banks play an important role in the process by which the way money supply increases and decreaseII. How Do Banks Create Money?a. Reserves i. Deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserveb. Required Reservesi. Reserves that a bank is legally required to holdii. Based on its checking deposits c. Required Reserve Ratioi. The minimum fraction of deposits banks are required by law to keep as reserves d. Excess Reserves i. Reserves that banks hold over and above the legal requirement III. The Federal Reserve System a. Establishment i. Discount Loans1. Loans the federal reserve makes to banksii. Discount Rate1. The interest rate the federal reserve charge son discount loansb. How They Manage Money Supplyi. Open Market Operations1. Federal Open Market Committeea. Responsible for open market operations and managing the money supply in the US2. Open Market Operationsa. The buying and selling of Treasury securities by the FederalReserve in order to control the money supply3. Board of Governorsa. Seven governors appointed by the President for 14 termb. Chair is appointed among one of the governors i. Currently Ben Bernanke ii. Monetary Policy 1. The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomics objectives2. To manage the money supply the Fed uses three monetary policy tools:a. Open market operationsb. Discount Policyi. By lowering the discount rate, the Fed can encourage banks to take additional loans and thereby increase their reserves. With more reserves, banks will make more loans to households and firms, which will increase checking account deposits and the money supply.c. Reserve Requirements i. When the Fed reduces the required reserve ratio, itconverts required reserves into excess reserves.IV. Why Don’t More Low-Income Countries Experience Rapid Growth?a. Failure to Enforce the Rule of Lawi. Property Rights1. The rights of an individual or firms have to the exclusive use of property, including the right to buy or sell itii. Rule of Law1. The ability of a government to enforce the laws of the country, particularly with respect to protecting private property and enforcing contractsb. Wars and Revolutionsi. Wars have made it impossible for countries such as Afghanistan, Ethiopia, the Central African Republic and the Congo to accumulate capital or adopt new technologies c. Poor Public and Education and Health i. Many low income counties have weak public school systems, so many workers are unable to read and write ii. People who are sick work less and are less productive when they workd. Low Rates of Saving and Investment i. The low savings rates in developing countries can contribute to vicious cycles of


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Mizzou ECONOM 1051 - Money, Banks and the Federal Reserve

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