Functions of Money
Allows people to buy goods and services
Medium of exchange
Money people put into banks
Deposits
Central bank of the United States
Federal Reserve
When the Fed buys bonds, the money supply does this
Increases
Prices of everyday goods increase quickly
Inflation
Allows money to be saved and used later
Store of value
How banks make most of their money
Interest on loans
What the Fed mainly controls
Money supply
When the Fed sells bonds, the money supply does this
Decreases
Loans are cheap and many people are borrowing. What is causing this?
Low interest rates
Allows prices to be listed and compared
Unit of account
System where banks keep part of deposits and loan the rest
Fractional reserve banking
One goal of the Fed
Stable prices / full employment / economic growth
Interest rate banks pay to borrow from the Fed
Discount rate
The economy is slowing and unemployment is rising. What should the Fed do?
Increase money supply / lower interest rates
Why is bartering inefficient? Give one reason
Requires double coincidence of wants / hard to measure value
You deposit $200. The bank keeps 10%. How much can be loaned?
$180
Why the Fed is independent
Avoids political pressure / makes stable decisions
The Fed raises interest rates. What happens to borrowing and spending?
Both decrease
Prices are falling and people delay spending. What is happening and why is it bad?
Deflation; slows economy
A farmer tries to trade eggs for shoes, but the seller doesn’t want eggs. What problem is this?
Double coincidence of wants
What happens if many people try to withdraw money at the same time?
Bank run (bank may fail)
How many regional Federal Reserve banks exist
12
The Fed wants to slow inflation. Name TWO actions it can take
Raise interest rates; sell bonds; increase reserve requirements
The Fed sells bonds. Explain what happens next in the economy
Money supply decreases → interest rates rise → borrowing/spending fall → inflation slows