Chapter 14-Macro

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Chapter 14-Macro

  1. 1. Macro McEachern 2011 ECON 1 2010- CHAPTER Designed by Amy McGuire, B-books, Ltd. Chapter 14 Money and the Financial System Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 1
  2. 2. The Evolution of Money  No exchange  No money  Specialization  Exchange: Barter  Barter  Double coincidence of wants  Agree on exchange rate LO1 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 2
  3. 3. One Red Paper Clip??? Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 3
  4. 4. The Evolution of Money  The earliest money  Good – easily traded later  High degree of acceptability  Functions of money  Medium of exchange  Commodity money  Unit of account  Store of value  Retains purchasing power over time LO1 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 4
  5. 5. The Evolution of Money  Properties of the ideal money  Durable  Portable  Divisible  Uniform quality  Low opportunity cost  Relatively stable in value LO1 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 5
  6. 6. LO1 Exhibit 1 Six Properties of Ideal Money Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 6
  7. 7. Coins  Coinage  Amount and quality of the metal  By count  Problems  Getting clipped  Counterfeiting  Token money  Face value > cost of coinage  Seigniorage – profit from coinage LO1 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 7
  8. 8. Money and Banking  Banks = Goldsmith  Safekeeping  Earn interest  Checks  Extend loans  Create medium of exchange, money  Public confidence  Fractional reserve banking system LO1 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 8
  9. 9. Representative Money and Fiat Money  Bank notes  IOUs  Paper money  As good as gold  Representative money  Represented gold in the bank’s vault  Fiat money  From the power of the state  Legal tender LO1 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 9
  10. 10. The Value of Money  Purchasing power of money  Rate of exchange for goods and services  Higher price level in economy  Smaller purchasing power  Purchasing power of $ in a year  100 ÷Price index in same year  Evolution over time  Steady decline since 1960 LO1 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 10
  11. 11. LO1 Purchasing Power of $1 Measured Exhibit 2 in 1982–1984 Constant Dollars An increase in the price level over time reduces what $1.00 buys. The price level has risen every year since 1960, so the purchasing power of $1.00 (measured in 1982-1984 constant dollars) has fallen from $3.38 in 1960 to $0.47 in 2009. Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 11
  12. 12. When Money Performs Poorly  Hyperinflation in Zimbabwe  Prices grow by the hour  Not reliable store of value  Exchange for stable currency  Barter LO1 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 12
  13. 13. Financial Institutions in the U.S.  Depository institutions  Commercial banks  Loans to businesses  Thrift institutions  Savings banks  Credit unions  Loans to households LO2 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 13
  14. 14. The Fed  Before 1863: State banks – Chartered by states  National Banking Act of 1863 – National banks – Issue notes – Regulated  Dual banking system  19th century LO3 – Panic ‘runs’ Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 14
  15. 15. The Fed LO Chapter 14  1913 Federal Reserve System – Central bank – Monetary authority – 12 Federal Reserve districts  National banks – Had to join the Fed  State banks – Voluntary membership to the Fed 3 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 15
  16. 16. The Twelve Federal Reserve Districts Exhibit 3 LO3 The map shows by color the area covered by each of the 12 Federal Reserve districts. Black dots note the locations of the Federal Reserve Bank in each district. Identified with a star is the Board of Governors headquarters in Washington, D.C. Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 16
  17. 17. The Fed LO3 Chapter 14  Powers of the Fed – Issue bank notes – Buy and sell government securities – Extend loans to member banks – Clear checks in the banking system – Reserve requirement for member banks  Banker’s bank Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 17
  18. 18.  Board of Governors – 7 members • Appointed by the President • Confirmed by the Senate • 14-year nonrenewable term • Insulated from political pressure • 1 chair: 4 years – Set and implement monetary policy LO4 – Oversees the 12 reserve banks Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 18
  19. 19.  Federal Open Market Committee FOMC – Open-market operations • The Fed buys, sells government securities – 7 board governors – 5 presidents of reserve banks – Advise the board LO4 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 19
  20. 20. http://www.federalreserve.gov/monetarypolicy/fomc.htm Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 20
  21. 21. Exhibit 4 LO Organization Chart of the Federal Reserve System 4 Members of the Board of Governors: appointed by the president, confirmed by the Senate. Seven board members also belong to the 12-member Federal Open Market Committee, which advises the board. The Board of Governors controls the Reserve Banks in each of the 12 districts, which in turn control the US banking system. Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 21
  22. 22. LO Chapter 14  Regulating the money supply – Open-market operations – Discount rate – Reserve requirements  Deposit insurance – Federal Deposit Insurance Corporation, FDIC • $250,000 per depositor per bank • 90% banks 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 22
  23. 23. The Panic of 1907 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 23
  24. 24. Who is the Federal Reserve Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 24
  25. 25.  Goals – High level of employment in economy – Economic growth – Price stability – Interest rate stability – Financial market stability – Exchange rate stability LO4 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 25
  26. 26.  Before 1930s: Own corporate stock; bonds  After 1930s – Banking = heavily regulated • Loans, government securities • Ceiling on interest rates for deposits  1970s: Inflation • Increase interest rates • Withdrawals  Money market mutual fund • Limited check writing LO4 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 26
  27. 27.  Money market deposit accounts – $8 billion in 1978 – $200 billion in 1982  Deposit insurance  Unregulated interest rates  Wider variety of assets  Moral hazard problem LO4 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 27
  28. 28.  Savings banks – Wild gambles – Insolvency – Collapse of a growing number of banks – 1989 what was then largest financial bailout – 3,418 in 1984 – 1,220 in 2008  Credit unions – Declined 34% LO4 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 28
  29. 29. LO4 Exhibit 5 Failures of U.S. Savings Banks Peaked in 1989 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 29
  30. 30.  Demise of commercial banks – Risky decisions – Unsound loans – Failures, mergers, acquisitions – 14,496 in 1984 – 7,085 in 2008 LO4 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 30
  31. 31. LO4 Exhibit 6 Failures of U.S. Commercial Banks Peaked in 1988 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 31
  32. 32.  Large number of U.S. banks – Past restrictions on bank branches  Branching restrictions – Inefficiencies – Bank failures (Great Depression)  Bank holding company – Owns several banks – Offers other services  Bank mergers – Expand geographically LO4 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 32
  33. 33. Number of Commercial Banks Declined over the Last Two Decades, but the Number of Branches Continues to Grow Exhibit 7 LO4 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 33
  34. 34.  U.S. banks – Domestic deposits – Mergers and acquisitions – National banks  Worldwide assets – No U.S. bank • J.P. Morgan Chase, Bank of America, and Citibank were 13th through 15th, respectively. LO4 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 34
  35. 35. Largest U.S. Banks Based on Total Domestic Deposits Exhibit 8(a) LO4 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 35
  36. 36. World’s Largest Banks Based on Total Assets Exhibit 8(b) LO4 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 36

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