The document discusses the functions of money and monetary policy. It defines money as a medium of exchange, unit of account, store of value, and standard for deferred payment. It also outlines the four functions of money, different items historically used as money, how the price level is determined, requirements for an effective currency, components of the money supply, and the quantity theory of money. It introduces the Federal Reserve as the central bank that implements monetary policy in the US to maintain price stability and full employment through tools like open market operations and setting the federal funds rate.

1. Monetary Policy &
the Federal Reserve System
another and alternative method
for managing the level of
economic activity
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2. Four Functions of Money
(o) as a medium of exchange
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3. Money is a tool for exchanging
Resources for Goods & Services
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4. Four Functions of Money
(o) as a unit of account
4

5. Four Functions of Money
(o) As a standard of and for
deferred payment
to enumerate IOUs
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6. Four Functions of Money
(o) as store of value
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7. What has been used as money?
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8. Wampum
(o) could be belts of beads
(o) in New York the beads
were made from found shells
(o) the Indians made good
wampum belts
(o) the Colonists wampum
belts were not made so well
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9. What has been used as money?
Woodpecker Cowrie Stones Pecus Women
Skulls
Shells
Tobacco Wampum Corn Animal Bark
Teeth Cloth
Barley Beads Butter Feathers Fish
Fur Liquor Oats Peas Paper
Pieces
Sal Tobacco Strings Whale Metals
Teeth
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10. The Price Level is
determined by:
The relationship between
the amount of money in
circulation and the amount of
goods and
services in the
economy.
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11. Requirements of Money
• Confidence
• Scarce
• Even quality
• Maintains value
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12. Money Supply (or “M1”)
• Coins
• Currency
• Demand Deposits
• other “checkable” accounts
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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
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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)
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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
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16. Two other functions
(o) Banker to member banks. The
federal funds rate is the interest rate at which depository
institutions actively trade balances held at the Federal
Reserve on an uncollateralized basis
(o) Banker to Federal Government.
An Open Market Operation (also known as “OMO”) is an
activity by a central bank to buy or sell government bonds
on the open market. A central bank uses them as the
primary means of implementing monetary policy
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17. Twelve Federal Reserve Districts
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