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Similar a Chapter 14-Macro (20)
Chapter 14-Macro
- 2. The Evolution of Money
No exchange
No money
Specialization
Exchange: Barter
Barter
Double coincidence of
wants
Agree on exchange rate
LO1
Chapter 14
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- 3. One Red Paper Clip???
Chapter 14
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- 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
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- 5. The Evolution of Money
Properties of the ideal money
Durable
Portable
Divisible
Uniform quality
Low opportunity cost
Relatively stable in value
LO1
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- 6. LO1
Exhibit 1
Six Properties of Ideal Money
Chapter 14
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- 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
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- 8. Money and Banking
Banks = Goldsmith
Safekeeping
Earn interest
Checks
Extend loans
Create medium of
exchange, money
Public confidence
Fractional reserve banking
system
LO1
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- 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
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- 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
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- 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
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- 12. When Money Performs Poorly
Hyperinflation in Zimbabwe
Prices grow by the hour
Not reliable store of value
Exchange for stable
currency
Barter
LO1
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- 13. Financial Institutions
in the U.S.
Depository institutions
Commercial banks
Loans to businesses
Thrift institutions
Savings banks
Credit unions
Loans to households
LO2
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- 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’
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- 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
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- 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.
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- 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
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- 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
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- 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
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- 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
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- 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
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- 23. The Panic of 1907
Chapter 14
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- 24. Who is the Federal Reserve
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- 25. Goals
– High level of employment
in economy
– Economic growth
– Price stability
– Interest rate stability
– Financial market stability
– Exchange rate stability
LO4
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- 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
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- 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
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- 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
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- 29. LO4
Exhibit 5
Failures of U.S. Savings Banks Peaked in 1989
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- 30. Demise of commercial banks
– Risky decisions
– Unsound loans
– Failures, mergers, acquisitions
– 14,496 in 1984
– 7,085 in 2008
LO4
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- 31. LO4
Exhibit 6
Failures of U.S. Commercial Banks
Peaked in 1988
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- 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
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- 33. Number of Commercial Banks Declined
over the Last Two Decades, but the
Number of Branches Continues to Grow
Exhibit 7
LO4
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- 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
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- 35. Largest U.S. Banks Based on
Total Domestic Deposits
Exhibit 8(a)
LO4
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- 36. World’s Largest Banks Based on
Total Assets
Exhibit 8(b)
LO4
Chapter 14
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