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  1. 1. Monetary Policy &the Federal Reserve Systemanother and alternative method for managing the level of economic activity 1
  2. 2. Four Functions of Money(o) as a medium of exchange 2
  3. 3. Money is a tool for exchangingResources for Goods & Services 3
  4. 4. Four Functions of Money(o) as a unit of account 4
  5. 5. Four Functions of Money(o) As a standard of and fordeferred payment to enumerate IOUs 5
  6. 6. Four Functions of Money (o) as store of value 6
  7. 7. What has been used as money? 7
  8. 8. Wampum(o) could be belts of beads(o) in New York the beadswere made from found shells(o) the Indians made goodwampum belts(o) the Colonists wampumbelts were not made so well 8
  9. 9. What has been used as money?Woodpecker Cowrie Stones Pecus Women Skulls ShellsTobacco Wampum Corn Animal Bark Teeth ClothBarley Beads Butter Feathers Fish Fur Liquor Oats Peas Paper Pieces Sal Tobacco Strings Whale Metals Teeth 9
  10. 10. The Price Level is determined by:The relationship betweenthe amount of money incirculation and the amount of goods andservices in theeconomy. 10
  11. 11. Requirements of Money• Confidence• Scarce• Even quality• Maintains value 11
  12. 12. Money Supply (or “M1”)• Coins• Currency• Demand Deposits• other “checkable” accounts 12
  13. 13. MV = PQ• M = money supply• V = velocity of money or how many times the money supply is used to purchase final goods and services• P = the (general) price level• Q = the quantity of real goods and services produced• PQ = Nominal GDP 13
  14. 14. Inflation• Assuming the V (the money velocity) does not change then the P (the general price level) is determined by the relationship between the change in the amount of money in circulation and the change in real goods and services• Inflation is caused by an increase in the M (the money supply) greater than an increase in the Q (the quantity of real goods and services produced) 14
  15. 15. The Federal Reserve (a/k/a “The Fed”)• was established by the Congress via the Federal Reserve Act of 1913• Alan Greenspan is an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006• Ben Shalom Bernanke is an American economist and currently chairman of the central bank ~ the United States. On February 1, 2006 President George W. Bush appointed him to be chairman• The major function of the Federal Reserve is to maintain the proper money supply for stable price level – Too much money would support and facilitate inflation – Too little money would support and facilitate unemployment 15
  16. 16. Two other functions(o) Banker to member banks. Thefederal funds rate is the interest rate at which depositoryinstitutions actively trade balances held at the FederalReserve on an uncollateralized basis(o) Banker to Federal Government.An Open Market Operation (also known as “OMO”) is anactivity by a central bank to buy or sell government bondson the open market. A central bank uses them as theprimary means of implementing monetary policy 16
  17. 17. Twelve Federal Reserve Districts 17