Money and Banking

2,726 views

Published on

0 Comments
3 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
2,726
On SlideShare
0
From Embeds
0
Number of Embeds
6
Actions
Shares
0
Downloads
138
Comments
0
Likes
3
Embeds 0
No embeds

No notes for slide

Money and Banking

  1. 1. T- 1-855-694-8886 Email- info@iTutor.com By iTutor.com
  2. 2. The Functions of Money The three functions of money are:  Medium of exchange  Used to buy goods and services  Accepted in payments  Barter system  Convenient way of exchange: specialization  Unit of account  Monetary units (KD) to measure the relative worth of goods and services  The price of each good and services is stated in monetary terms  Enable buyers to compare between a verity of goods and services  Debt, GDP, taxes © iTutor. 2000-2013. All Rights Reserved
  3. 3.  Store of value  Transfer purchasing power from the present to the future  Savings  Best store of value in short terms  Efficient liquid asset  Liquidity: transformation of an asset into goods and services  Inflation © iTutor. 2000-2013. All Rights Reserved
  4. 4. The Components of the Money Supply  Two definitions of the U.S. money supply are M1 and M2.  M1 is the narrowest definition of the money supply, whereas M2 is a more broadly defined money supply. Currency includes coins and paper money.  All coins in circulation are token money.  Paper money, issued by the Federal Reserve Banks, are known as Federal Reserve Notes. Money Definition: M1 M1 money = currency + checkable deposits The U.S. money supply is guaranteed by government’s ability to keep the value of money relatively stable. © iTutor. 2000-2013. All Rights Reserved
  5. 5. Value of Money Money has value because of its acceptability, legal tender designation, and relative scarcity.  Government has decreed currency as legal tender; paper money is a valid and legal means of payment of debt. 1. Acceptability 2. Legal Tender 3. Relative scarcity © iTutor. 2000-2013. All Rights Reserved
  6. 6. Money and Prices  The purchasing power of money is the amount of goods and services a unit of money will buy.  The purchasing power of the dollar varies inversely with the price level.  If the price level rises, the purchasing power of the dollar falls, and vice versa.  Inflation may also affect the purchasing power of money and its acceptability.  When the government prints too much money, the purchasing power of money declines.  Also, runaway inflation may significantly reduce the purchasing power of the dollar and may cause it to cease being used as a medium of exchange. © iTutor. 2000-2013. All Rights Reserved
  7. 7. The Federal Reserve System and The Banking System  A key element of the U.S. banking system is the Federal Reserve System (the “Fed”).  The Fed consists of the Board of Governors of the Federal Reserve and 12 regional Federal Reserve Banks. © iTutor. 2000-2013. All Rights Reserved
  8. 8. Board of Governors  The seven-member group that supervises and controls the money and banking system of the U.S.. The 12 Federal Reserve Banks  The 12 banks chartered by the U.S. government to control the money supply and perform other functions.  They collectively serve as the nation’s “central bank” and also serve as bankers’ bank. © iTutor. 2000-2013. All Rights Reserved
  9. 9. Federal Open Market Committee (FOMC)  The FOMC is the 12 member Federal Reserve group determines the purchase and sale policies of the Federal Reserve Banks in the market for U.S. securities.  The Federal Reserve Bank in New York City conducts most of the Fed’s open market operations. Commercial Banks and Thrifts  Of the approximately 7600 commercial banks, three- fourths are state banks, while the remaining one-fourth are national banks, chartered by the Federal government to operate nationally.  The 11,400 thrift institutions are regulated by agencies separate and apart from the Board of Governors and the Federal Reserve Banks. © iTutor. 2000-2013. All Rights Reserved
  10. 10. Fed Functions and Responsibilities  The Fed performs the following functions.  Issues currency  Sets reserve requirements and holds reserves  Lends money to banks and thrifts  Provides the banking system with a means for collecting checks  Acts as a fiscal agent for the Federal government  Supervises the operation of banks  Controls the money supply © iTutor. 2000-2013. All Rights Reserved
  11. 11. Fed Reserve Independence  The Federal Reserve is an independent agency of the government.  This protects the Fed from political pressure so that it could effectively control the money supply and interest rates to foster price-level stability. Depositing Reserves in a Federal Reserve Bank  All commercial banks and thrifts that provide checkable deposits must by law keep required reserves.  Required reserves are an amount of funds equal to a specified percentage of the bank’s own deposit liabilities.  Required reserves must be kept on deposit with the Federal Reserve Bank or held as cash in the bank’s vault. © iTutor. 2000-2013. All Rights Reserved
  12. 12. Depositing Reserves in a Federal Reserve Bank  The “specified percentage” of checkable deposit liabilities that a commercial bank must be keep as reserves is known as the reserve ratio. Reserve Bank’s required reserves ratio Bank’s checkable-deposit liabilities = © iTutor. 2000-2013. All Rights Reserved
  13. 13. The End For more information call us 1-855-694-8886 Visit www.iTutor.com

×