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Chapter 14-Macro
- 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. The Evolution ofMoney 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. One Red PaperClip??? Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 3
- 4. The Evolution ofMoney 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. The Evolution ofMoney 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. LO1 Exhibit 1 Six Propertiesof Ideal Money Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 6
- 7. Coins Coinage Amountand 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. 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. Representative Money and FiatMoney 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. The Value ofMoney 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. LO1 Purchasing Powerof $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. When Money PerformsPoorly 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. Financial Institutions in theU.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. The Fed Before1863: 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. 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. The Twelve FederalReserve 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. 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. Board ofGovernors – 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. Federal OpenMarket 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. http://www.federalreserve.gov/monetarypolicy/fomc.htm Chapter 14 Copyright ©2010by South-Western, a division of Cengage Learning. All rights reserved 20
- 21. Exhibit 4 LO Organization Chartof 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. LO Chapter 14 Regulatingthe 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. The Panic of1907 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 23
- 24. Who is theFederal Reserve Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 24
- 25. Goals – Highlevel 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. 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. Money marketdeposit 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. 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. LO4 Exhibit 5 Failures ofU.S. Savings Banks Peaked in 1989 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 29
- 30. Demise ofcommercial 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. LO4 Exhibit 6 Failures ofU.S. Commercial Banks Peaked in 1988 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 31
- 32. Large numberof 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. Number of CommercialBanks 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. 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. Largest U.S. BanksBased 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. World’s Largest BanksBased on Total Assets Exhibit 8(b) LO4 Chapter 14 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 36