Money

1. Money • Fiat/Legal Tender – money that has value because a government fiat, or order, has established it as acceptable for payment of debts. • Medium of Exchange – use of money in exchange for goods or services. • Measure of Value – use of money as a yardstick for comparing the values of goods and services in relation to one another. • Store of Value – use of money to store purchasing power for later use.

2. Banking • Interest Rate – amount of money the borrower must pay for the use of someone else’s money. Expressed in a percentage. • Prime Rate – rate of Interest banks charge on loans to their best business customers. • Loans – money that is given with the idea that it will be paid in return. • Collateral – something of value that a borrower lets the lender claim if a loan is not repaid. • Credit Unions – depository institution owned & operated by its members to provide savings accounts & low interest loans to its members. • Savings & Loans – depository institution that, like a commercial bank, accepts deposits & lends money.

3. FEDERAL RESERVE Federal Reserve (FED) – created by Congress in 1913 to “provide for a safer and more flexible banking and monetary system.” • FED – 12 Districts – each served by one bank, divided into territories. • FED decisions do not have to be ratified by President or Congress. • Appointments to the Board of Governors – President appoints – Congress approves. • FED reports to Congress on its policies. Purpose of the FED – control nation’s money supply. • Tight Monetary Policy – makes credit expensive and in short supply in an effort to slow the economy. (inflation) • Loose Monetary Policy – makes credit inexpensive & abundant, to increase money in circulation. (recession)

4. Goal of the FED – • balance the need to create long-term growth in the economy • more jobs, consumer goods, continuing higher standard of living • Avoid inflation (higher prices). • Tools of the Federal Reserve • Discount Rate – the amount of interest that commercial banks pay the FED for borrowed funds. Banks in turn set their lending rates for companies, individuals, home mortgages, and auto loans. • Reserve Requirement – the amount of money banks must hold as security for loans. The higher the requirement, the less money banks have to loan. (expressed in a %) • Buying & Selling Government Securities – bonds and loans the government has received from private individuals and banks.