Splash Screen

1
Splash Screen
2
Chapter Menu
Chapter Introduction Section 1 The Evolution,
Functions, and Characteristics of Money Section
2 The Development of Modern Banking Section
3 The Federal Reserve System and Monetary
Policy Visual Summary
3
Chapter Intro 1
Congratulations, you have just been hired by the
federal government to completely redesign our
money. Before getting started on your design,
think about how we use money. Working with a
partner, create a design for the new bills and
coins. Share your finished product with the class
and explain why your money will serve the same
purpose(s) as our existing money. Read Chapter 14
to learn more about our monetary system and how
the government works to promote economic
stability and growth.
4
Chapter Intro 2
Governments strive for a balance between the
costs and benefits of their economic policies to
promote economic stability and growth.
5
Chapter Intro-End
6
Section 1-Preview
Section Preview
In this section, you will learn that money
functions as a medium of exchange, a measure of
value, and a store of value.
7
Section 1-Key Terms
Content Vocabulary

• Federal Reserve System (Fed)
• Federal Reserve notes
• barter economy

• commodity money
• fiat money
• specie
• monetary unit
• medium of exchange

• measure of value
• store of value
• demand deposit accounts (DDAs)
• M1
• M2

Academic Vocabulary

• evolution

• converted

8
Section 1
Would you prefer to obtain goods by bartering or
exchanging paper currency? A. bartering
B. exchanging paper currency

1. A
2. B

9
Section 1
The Evolution, Functions, and Characteristics of
Money

• The Federal Reserve System (Fed) issues most of
  the money in U.S. circulation.

• Paper currencyFederal Reserve notes

10
Section 1
The Evolution of Money
People invented money to make life easier.
11
Section 1
The Evolution of Money (cont.)

• In a barter economy, exchange of goods and
  services must have a mutual coincidence of
  wants.

• Money in primitive societies

• Commodity money
• Fiat money

12
Section 1
The Evolution of Money (cont.)

• The Continental Congress issued paper money to
  finance the Revolutionary War in 1775.

• Colonists also used specie like English
  shillings, Austrian talers, and Spanish pesos
  brought over by immigrants.
• The dollar is the basic monetary unit of currency
  in the U.S. money system.

13
Section 1
A mutual coincidence of wants refers to A. A
barter economy B. Commodity money C. Fiat money

1. A
2. B
3. C

14
Section 1
Characteristics and Function of Money
Anything can be used as money as long as it is
portable, durable, divisible, and limited in
supply.
15
Section 1
Characteristics and Function of Money (cont.)

• Characteristics of money

• Portable
• Durable
• Divisible into smaller units
• In limited supply

16
Section 1
Characteristics and Function of Money (cont.)

• Functions of money in the economy

• Medium of exchange
• Measure of value
• Store of value

17
Section 1
Characteristics and Function of Money (cont.)

• Todays money

• Federal Reserve notes
• Metallic coins issued by the U.S. Bureau of the
  Mint
• Demand deposit accounts (DDAs)

18
Section 1
Characteristics and Function of Money (cont.)

• The Fed has different definitions for the money
  supply.

• M1
• M2

19
Section 1
What areas of the world were participants in the
triangular trade? A. Africa, Spain, and the
North American colonies B. Spain, North
American colonies, and the Caribbean C. Africa,
Caribbean, and North American colonies D.
Caribbean, Spain, and Africa

1. A
2. B
3. C
4. D

20
Section 1-End
21
Section 2-Preview
Section Preview
In this section, you will learn that many
different types of money have been used
throughout American history, and fiat money is
used today.
22
Section 2-Key Terms
Content Vocabulary

• state bank
• legal tender
• national bank
• national currency

• gold certificate
• silver certificate
• central bank
• bank run
• bank holiday

• fractional reserve system
• legal reserves
• reserve requirement
• member bank reserves (MBR)
• excess reserves

Academic Vocabulary

• clauses

• initially

23
Section 2
Do you think the government should regulate
banking? A. Yes B. No C. Sometimes

1. A
2. B
3. C

24
Section 2
The Development of Banking in America
The United States experimented with many
different kinds of money before it created the
Federal Reserve System.
25
Section 2
The Development of Banking in America (cont.)

• Abuse and other problems in an unregulated money
  supply led to government intervention.

• After ratification of the U.S. Constitution,
  state banks issued their own paper currency.

26
Section 2
The Development of Banking in America (cont.)

• Currency problems

• Each bank issued own currency in different sizes,
  colors, and denominations.
• Banks were tempted to issue more notes than
  backed with silver or gold.
• Counterfeiting became a problem.

27
Section 2
The Development of Banking in America (cont.)

• Congress printed paper currency in 1861 declaring
  it legal tender.

• Individuals referred to new paper notes as
  greenbacks.
• The National Currency Act in 1863 created a
  National Banking System (NBS).

28
Section 2
The Development of Banking in America (cont.)

• A national bank issued its own notes called
  national currency.

• This was backed with bonds banks purchased from
  federal government.
• Government was engaged in bank inspections.
• 10 tax applied to all privately issued bank
  notes.

29
Section 2
The Development of Banking in America (cont.)

• Gold certificates were issued.

• Silver certificates were introduced in 1878.

30
Section 2
What event changed the commercial banking
industry in the United States forever? A. Revoluti
onary War B. Industrialization C. Civil War D.
Mining of silver

1. A
2. B
3. C
4. D

31
Section 2
The Creation of the Fed
The Federal Reserve System is the nations
central bank.
32
Section 2
The Creation of the Fed (cont.)

• By the 1900s, the National Banking System was
  showing signs of strain.

• Difficulty in providing enough currency for a
  growing nation
• System not designed for popular method of
  payingchecking accounts
• Minor recessions caused major problems for banks
  and lending institutions.

33
Section 2
The Creation of the Fed (cont.)

• Congress created the Federal Reserve System, or
  Fed, as the nations central bank in 1913.

• Membership required by all national banks
• State-chartered banks were eligible for
  membership.
• Membership banks purchased stock in the Fed.

34
Section 2
The Creation of the Fed (cont.)

• The Fed issued its own currency, replacing all
  other types of currency.

• Despite creation of the Fed, banking industry was
  overextended when Great Depression began in 1929.

State and National Banks
35
Section 2
The Creation of the Fed (cont.)

• Banks did not have deposit insurance for
  customers.

• Bank runs caused many banks to fail.
• Bank holidaydeclared by President Roosevelt
  March 5th, 1933

36
Section 2
The Creation of the Fed (cont.)

• The Banking Act of 1933 (Glass-Steagall Act)
  created the FDIC

• Insures customer deposits to a maximum specified
  amount if case of failure
• Provides sense of security
• Can seize banks and sell them if in danger of
  collapse

37
Section 2
The Creation of the Fed (cont.)

• Popularity of checking accounts led to reforms in
  the use of fractional bank reserves.

• Fractional reserve systembanks are required to
  keep only a portion of their total deposits in
  the form of legal reserves.
• Size of reserve is determined by a reserve
  requirement and is set aside in vault as cash or
  in a member bank reserve (MBR).

38
Section 2
The Creation of the Fed (cont.)

• Remaining excess reserves represents the banks
  lending power and can be loaned out.

Fractional Reserves and the Money Supply
39
Section 2
What is the percentage of reserve requirement
currently used by banks? A. 25
B. 15 C. 20 D. 10

1. A
2. B
3. C
4. D

40
Section 2-End
41
Section 3-Preview
Section Preview
In this section, you will learn how the Federal
Reserve System is organized and conducts monetary
policy.
42
Section 3-Key Terms
Content Vocabulary

• member bank
• monetary policy
• interest rate
• easy money policy

• tight money policy
• open market operations
• discount rate
• prime rate

• quantity theory of money
• currency
• coins
• bank holding companies
• Regulation Z

Academic Vocabulary

• aspects

• functions

43
Section 3
The chairman of the Federal Reserve Board is
considered to be the second most powerful
individual in the nation. A. True B. False

1. A
2. B

44
Section 3
Structure of the Fed
The Fed is organized as a corporation, owned by
its member banks, and directed by a
government-appointed board.
45
Section 3
Structure of the Fed (cont.)

• The Fed

• Privately owned by its member banks
• Directed by a seven-member Board of Governors

• Appointed by the President and approved by the
  Senate
• Each serves a 14-year term
• Primarily a regulatory and supervisory agency to
  member banks

46
Section 3
Structure of the Fed (cont.)

• The Fed

• Operates 12 Federal Reserve district banks

• The Federal Open Market Committee (FOMC) makes
  decisions about interest rates.

• Twelve voting members including seven-member
  Board of Governors
• Meet eight times a year to review the economy and
  make monetary changes

47
Section 3
Structure of the Fed (cont.)

• Three committees advise the Board of Governors.

• The Federal Advisory Council advises on matters
  concerning overall health of economy.
• The Consumer Advisory Council advises on consumer
  credit laws.

Profiles in EconomicsBen S. Bernanke
48
Section 3
Structure of the Fed (cont.)

• Three committees advise the Board of Governors.

• Thrift Institutions Advisory Council advises on
  matters pertaining to Savings and Loan industry.

Structure of the Federal Reserve System
49
Section 3
What are some trends in the economy that the FOMC
reviews? A. Construction B. Employment C.
Consumer spending D. All of the above

1. A
2. B
3. C
4. D

50
Section 3
Conducting Monetary Policy
Monetary policy involves expanding and
contracting the money supply to change the level
of interest rates.
51
Section 3
Conducting Monetary Policy (cont.)

• The Fed is responsible for monetary policy.

• More money is demanded when the interest rate is
  low.
• Easy money policy
• The Fed restricts the size of the money supply in
  a tight money policy.

Short-Run Impact of Monetary Policy
52
Section 3
Conducting Monetary Policy (cont.)

• Fed uses three major tools to conduct monetary
  policy

• Reserve requirement
• Open market operations
• Discount ratePrime rate

The Reserve Requirement as aTool of Monetary
policy
53
Section 3
Conducting Monetary Policy (cont.)

• Impact of monetary policy

• Impact is complex
• Length of time for impact is unknown.
• Money supply also affects general price
  levelquantity theory of money.

Monetary Policy Tools
54
Section 3
If the Fed lowers the discount rate, what effect
does that have on your purchase of a used
car? A. Interest rate decreases, lowering the
cost of financing. B. Interest rate increases
therefore, cost of financing goes up. C. No
impact on your purchase

1. A
2. B
3. C

55
Section 3
Other Fed Responsibilities
As the nations central bank, the Fed is
responsible for most aspects of banking and the
payments system.
56
Section 3
Other Fed Responsibilities (cont.)

• Additional Fed responsibilities

• Maintaining the money supply

• Currencynotes printed by the U.S. Bureau of
  Engraving and Printing
• Coins produced by the Bureau of the Mint

57
Section 3
Other Fed Responsibilities (cont.)

• Additional Fed responsibilities

• Maintaining the payments system

• Electronic transfer of funds via clearinghouses
• Internet banking

58
Section 3
Other Fed Responsibilities (cont.)

• Additional Fed responsibilities

• Regulating and supervising banks

• Establishes and monitors guidelines governing
  banking behavior including bank holding companies

59
Section 3
Other Fed Responsibilities (cont.)

• Additional Fed responsibilities

• Preparing consumer legislation

• Implements consumer legislation such as federal
  Truth in Lending Act

• Regulation Z

• Serving as the federal governments bank

60
Section 3
Which is not considered an action conducted by
the governments bank? A. Nationwide auctions of
Treasury securities B. Regulation Z
disclosures C. Maintains demand deposit
accounts for Treasury D. Operation of
clearinghouses

1. A
2. B
3. C
4. D

61
Section 3-End
62
VS 1
Money People began using money because it made
buying and selling easier than bartering.
63
VS 2
Development of Modern Banking Problems with the
money supply before 1914 led to the creation of
the Federal Reserve System.
64
VS 3
Monetary Policy The Federal Reserve System has
three main policy tools at its disposal. It uses
these tools to affect the money supply and
interest rates.
65
VS-End
66
Figure 1
67
Figure 2
68
Figure 3
69
Figure 4
70
Figure 5
71
Figure 6
72
Profile
Ben S. Bernanke (1953 )

• distinguished academic career as an economics
  professor
• sworn in as chairman of the Federal Reserve Board
  in 2006

73
Concept Trans Menu
Economic Concepts Transparencies
Transparency 5 Economic Institutions and
Incentives Transparency 6 Exchange, Money, and
Interdependence Transparency 18 Monetary Policy
Select a transparency to view.
74
Concepts Trans 1
75
Concepts Trans 2
76
Concepts Trans 3
77
DFS Trans 1
78
DFS Trans 2
79
DFS Trans 3
80
Vocab1
Federal Reserve System (Fed) privately owned,
publicly controlled, central bank of the United
States
81
Vocab2
Federal Reserve notes paper currency issued by
the Fed in use today
82
Vocab3
barter economy moneyless economy that relies on
trade or barter
83
Vocab4
commodity money money that has an alternative use
as an economic good
84
Vocab5
fiat money money by government decree
85
Vocab6
specie money in the form of gold or silver coins
86
Vocab7
monetary unit standard unit of currency in a
countrys money supply
87
Vocab8
medium of exchange money or other substance
generally accepted as payment for goods and
services
88
Vocab9
measure of value a function of money that allows
it to serve as a common way to express value
89
Vocab10
store of value a function of money that allows
people to preserve value for future use
90
Vocab11
demand deposit account (DDA) account from which
funds can be removed by writing a check and
without having to gain prior approval from the
depository institution
91
Vocab12
M1 component of the money supply relating to
moneys role as a medium of exchange
92
Vocab13
M2 component of the money supply relating to
moneys role as a store of value
93
Vocab14
revolution an overthrow of government
94
Vocab15
converted changed into a different form
95
Vocab16
state bank bank that receives its charter from
the state in which it operates
96
Vocab17
legal tender fiat currency that must be accepted
for payment by decree of the government
97
Vocab18
national bank commercial bank chartered by the
National Banking System
98
Vocab19
national currency currency backed by government
bonds and issued by commercial banks in the
National Banking System
99
Vocab20
gold certificate paper currency backed by gold
and issued between 1863 and 1934
100
Vocab21
silver certificate paper currency backed by, and
redeemable for, silver from 1878 to 1968
101
Vocab22
central bank bank that can lend money to other
banks in times of need
102
Vocab23
bank run sudden rush by depositors to withdraw
all deposited funds, generally in anticipation of
bank failure or closure
103
Vocab24
bank holiday brief period during which all banks
or depository institutions are closed to prevent
bank runs
104
Vocab25
fractional reserve system system requiring
financial institutions to set aside a fraction of
their deposits in the form of reserves
105
Vocab26
legal reserves currency and deposits used to meet
the reserve requirement
106
Vocab27
reserve requirement formula used to compute the
amount of a depository institutions required
reserves
107
Vocab28
member bank reserve (MBR) reserves kept by member
banks at the Fed to satisfy reserve requirements
108
Vocab29
excess reserves financial institutions cash,
currency, and reserves not needed for reserve
requirements
109
Vocab30
clauses distinct articles or provisions in a
contract, treaty, will, or other formal or legal
document
110
Vocab31
initially originally at the beginning
111
Vocab32
member bank bank belonging to the Federal Reserve
System
112
Vocab33
monetary policy actions by the Federal Reserve
System to expand or contract the money supply in
order to affect the cost and availability of
credit
113
Vocab34
interest rate the price of credit to a borrower
114
Vocab35
easy money policy monetary policy that results in
lower interest rates and greater access to credit
115
Vocab36
tight money policy monetary policy that results
in higher interest rates and restricted access to
credit
116
Vocab37
open market operations sales or purchases of U.S.
government securities by the Fed
117
Vocab38
discount rate interest rate that the Federal
Reserve System charges on loans to the nations
financial institutions
118
Vocab39
prime rate lowest rate of interest rate that
banks charge their best customers
119
Vocab40
quantity theory of money hypothesis that the
supply of money directly affects the price level
over the long run
120
Vocab41
currency paper component of the money supply,
today consisting of Federal Reserve notes
121
Vocab42
coins metallic forms of money such as pennies,
nickels, dimes, and quarters
122
Vocab43
bank holding company company that owns and
controls one or more banks
123
Vocab44
Regulation Z provision extending truth-in-lending
disclosures to consumers
124
Vocab45
aspects parts, phases
125
Vocab46
functions roles or purposes
126
Help
To use this Presentation Plus! product
Click the Forward button to go to the next
slide. Click the Previous button to return to the
previous slide. Click the Home button to return
to the Chapter Menu. Click the Transparency
button from the Chapter Menu, Chapter
Introduction, or Visual Summary slides to access
the Economic Concepts transparencies that are
relevant to this chapter. From within a section,
click on this button to access the relevant Daily
Focus Skills Transparency. Click the Return
button in a feature to return to the main
presentation. Click the Economics Online button
to access online textbook features. Click the
Reference Atlas button to access the Interactive
Reference Atlas. Click the Exit button or press
the Escape key Esc to end the chapter slide
show. Click the Help button to access this
screen. Links to Presentation Plus! features such
as Graphs in Motion, Charts in Motion, and
figures from your textbook are located at the
bottom of relevant screens.
127
End of Custom Shows
This slide is intentionally blank.