Money and the Federal Reserve System

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Money and the Federal Reserve System
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Four Functions of Money

• Medium of exchange

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Money is a tool for exchanging resources for
goods and services
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Four Functions of Money

• Unit of account

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Four Functions of Money

• Standard of deferred payment

IOU
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Four Functions of Money

• Store of Value

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What has been used as money?
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Wampum

• Belts of beads
• Beads made from seashells found in New York
• Indians made good ones
• Colonists didnt

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What has been used as money?
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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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Requirements of Money

• Confidence
• Scarce
• Even quality
• Maintain value

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Money Supply (M1)

• Coins
• Currency
• Demand Deposits
• Other checkable accounts

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MV PQ

• M money supply
• V velocity of money, how many times the money
  supply is used to purchase final goods and
  services
• P the price level
• Q the quantity of real goods and services
  produced
• PQ Nominal GDP

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Inflation

• Assuming V does not change, P 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 M that is
  greater than an increase in Q.

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The Federal Reserve (The Fed)

• Established by Congress with the Federal Reserve
  Act of 1913
• Major function maintain the proper money supply
  for stable price level
• Too much money inflation
• Too little money - unemployment

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Two other functions

• Banker to member banks
• Banker to Federal Government

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Twelve Federal Reserve Districts