Economics Notes

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CHAPTER 10 REVIEW

LOOSE/EASY MONEY	TIGHT MONEY
Lowering the Discount Rate	Raising the Reserve Requirements
Allowing banks to loan more money to its customers	Requiring a larger down payment for cars and houses
Allowing people to buy cars with zero down payment	Raising discount rate
Lowering the Reserve Requirements	Requiring that all new car loans be paid off in 12 months (pay off faster)
Used during a recession	Making banks pay 25% to the Fed to borrow money (Higher interest rates)
Used to control a recession	Requiring banks to keep a higher percentage of their deposits on site at all times (higher Reserve Requirement)
	Used to Control Inflation

LOOSE MONEY/EASY MONEY

            This is the FED’s monetary policy if the economy needs a boost.

TIGHT MONEY

            This is the FED’s monetary policy if there is too much money in the economy.

DISCOUNT RATE:

            If this is raised, banks must pay a higher interest rate to borrow money from the FED.

PRIME RATE

            This is the interest that a banks BEST CUSTOMERS must pay to borrow money.

            Only the BEST CUSTOMERS receive the Prime Rates.

CREDIT REGULATION

            If this is raised, you must have more cash to buy a car

RESERVE REQUIREMENT:

            The money that banks must keep on hand at all times.   

If this is raised, banks will have less money to loan to customers.

·       Approximately $400,000,000 of old money is destroyed by the FEDS everyday

·       Inflation is a rise in prices. To slow inflation, the FED can raise the DISCOUNT RATE.

·       The Panic of 1907 caused the creation of the FED because of multiple bank failures.

·       Money: Federal Reserve NOTES come in all denominations $1, $5, $10, $20, $50, $100

·       There are 12 Districts in the Federal Reserve System

·       Memphis is in District 8

·       3 Local Branches in District 8 are Little Rock, AR, Louisville, KY and Memphis, TN.

·       District 8 Headquarters is in St. Louis, MO.

NOTES
THE FEDERAL RESERVE

THE CREATION OF THE FEDERAL RESERVE SYSTEM

·       Bank Panic of 1907 Cased the creation of The Federal Reserve

o   CAUSES:

§  No central lending site

§  Pyramided reserve system

NOT EVERY BANK IS A MEMBER OF THE FEDERAL RESERVE SYSTEM

ROLE OF THE FED

1.     Supervise member banks

2.     Hold Cash Reserves (loan money to banks)

3.     Move money in and out of circulation

The Federal Reserve = The Nations Bank The Federal Bank, The Government Bank

The agency that controls all Interest rates: on homes, credit cards, cars etc.

THE FEDERAL RESERVE LEADERS

National Board of Governors- the main decision making body.

·       Organization of the Fed (LEADER) Ben Bernanke (The Chair/In charge of the FED)

·       THE BOARD OF GOVERNORS

o   7 members appointed by the president and approved by the Senate

o   Stays in office 14 years, can only serve one term

o   Staggered terms, a new person comes in every two years

FEDERAL RESERVE DISTRICTS

·       There are 12 Districts

·       Memphis is in District 8

·       Headquarters is in St. Louis St. Louis (where they make the money for our district)

·       3 Local Branches in our District

o   Little Rock, AR

o   Louisville, KY

o   Memphis, TN

HOW YOU KNOW WHERE YOUR CASH WAS MADE

·       There are 12 districts (look on the circle on a dollar bill L=district 12) 

·       On a 20 look for the letter and number.  Example :E5

HOW THE FEDERAL RESERVE WORKS

1.     Loans to banks

a.    Seasonal Factors: Farmers need it in the Spring and the Fall, Christmas Time

b.    Natural Disasters: Hurricanes, Tornadoes

c.     Financial Emergencies: 911, etc.

2.     Check Clearing

a.    The number one way to spend money is to WRITE CHECKS

b.    The checks come through the Federal Reserve.

3.     The FED and the Government

a.    THE GOVERNMENTS BANK

                                               i.     All of the taxes, all of the tariffs go to the Fed. 

                                              ii.     They write the checks to Social Security, Medicare, Medicade, unemployment…everything that the country pays for.

b.    THE FED AS A WATCHDOG

It watches all of the banks books. To make sure everyone is honest.

NOT ALL BANKS ARE MEMBERS OF THE FED (Federal Reserve System)

THE FED AND MONETARY POLICY

Money policy -the plan the fed has for our economy to put money in or take money out

2 EXTREMES

1.     Easy Money Policy

a.    They pump money into the system. Make it easy for you to spend money.

b.    Happens in a recession.  “0% down”

c.     If the FED and announces they will lower the discount rate from 5% or 4% that would be easy money policy.

d.    EX. LOWERS THE DISCOUNT RATE

2.     Tight- Money Policy-

a.    They take money out of the system. Make it hard for you to spend money. Trying to stop inflation. 

b.    EX. RAISES THE DISCOUNT RATE

COMPONENTS OF THE FED’S MONETARY POLICY

1.     Discount Rate- interest rate that the FEDS charges banks to borrow money

a.    Prime Rate is the interest rate that banks charge their BEST CUSTOMERS.

b.    Variable Loan: interest Rates can change on your loan

DO ALL CUSTOMERS GET THE PRIME RATE? NO

DISCOUNT RATE affects the PRIME RATE

2.     Reserve Requirement

a.    The percentage of deposits that a bank must keep at all times

3.     Margin Requirement

4.     Credit Regulations

5.     FOMC and Securities

If the fed lowers the discount rate that’s easy money.

If the fed raises the discount rate that’s tight money.

FDIC BANKS

Guarantees if you put money in the bank they guarantee that you can get it out, up to a certain amount.