Sean Faria

Sean.faria001

Eco 2013

07/16/2010

Chapter 12 Assignment

1.

a. Money is used as a medium of exchange for goods and services, as a unit of account for

expressing price, and as a store of value.

b. People will only accept money in exchange for goods and services and for the work they

perform if they can be reasonably certain that the medium of exchange money will

retain its value until they are ready to spend it. In runaway inflations of the thousands or

tens of thousands of percent a year, people revert to barter. Again, drastic inflation

greatly reduces money’s use as a measure of value, for it is impossible to adjust

instantaneously all prices strictly in line with their relative values. Thus, opportunities

are afforded to speculators to profit at the expense of the less sophisticated who,

eventually, will learn to distrust money’s usefulness as a measure of value. Finally, and

most obviously, money’s usefulness as a store of value is destroyed in a drastic inflation.

The .rule of 70 is instructive here. By dividing the absolute inflation rate into 70, one can

estimate how long it takes ones dollar savings to lose half their purchasing power. At 7

percent inflation, the dollar will be worth half as much in ten years.
 c. The market value of the constituent metal within a coin, and the market value is the

price that a coin will fetch in the marketplace. For most coins in circulation this value is

coincident with the face value.

2.

a. The Fed Chair is selected by the President of the United States and confirmed by the

Senate.

b. The U.S. banking system consists of 12 Federal Reserve banks, with each one serving

member banks in its own district. This system, supervised by the Federal Reserve Board,

has broad regulatory powers over the money supply and the credit structure.

c. The Federal reserve bank of Atlanta I reside in. The other districts are Kansas City,

Dallas, and Atlanta.

d. The seven board members have long terms.14 Years and are staggered so that one

member is replaced every 2 years. The president selects the chairperson and vice-

chairperson of the board from among the members, and they serve 4-year terms.

Several entities assist the Board of Governors in determining banking and monetary

policy. The Federal Open Market Committee is the most important, voting on the Fed’s

monetary policy and directing the purchase or sale of government securities. Five of the

presidents of the Federal Reserve Banks have voting rights on the FOMC each year,

rotating the membership among the 12 banks, except for the president of the New York

Fed who has a permanent voting seat.

3.
 a. The 12 Federal Reserve Banks are central Banks whose policies are coordinated by the

Board of Governors. They are quasipublic banks, meaning that they are a blend of

private ownership and public control. They are also banker’s banks in that they perform

essentially the same functions for banks and thrifts as those institutions perform for the

public.

b. The Federal Reserve performs 7 basic functions:

i. The Fed issues Federal Reserve Notes, the paper currency used in the U.S.

monetary system.

ii. The Fed sets reserve requirements and holds the mandated reserves that are

not held as vault cash.

iii. The Fed lends money to banks and thrifts.

iv. The Fed provides for check collection.

v. The Fed acts as fiscal agent for the Federal government.

vi. The Fed supervises the operation of all U.S. banks.

vii. The Fed has responsibility for regulating the supply of money, and this in turn

enables it to affect interest rates.

c. The most important basic function is the seventh function, the Fed has responsibility for

regulating the supply of money, and this in turn enables it to affect interest rates.

4.

a. A debit card withdraws money directly from your checking account with no annual fees

or finance charges, whereas a credit card is a loan against a predetermined line of

credit.

b. Stored-value card: A card similar in size to a credit card that stores information with

either a computer chip or a magnetic stripe. Consumers buy the cards with prepaid
 value stored on them. The most common uses today are for telephone calls and store

gift cards.

c. Automated clearinghouse (ACH): A system of computer a network that allows banks to

transfer funds among themselves; used to make recurring, relatively low-value

payments, such as the direct deposit of salaries. Fedwire: An electronic communications

network that connects Federal Reserve Banks with the U.S. Treasury and other federal

agencies. Many depository institutions also have access to Fedwire. It is used for large-

dollar, time-sensitive payments. Fedwire transfers are immediate transfers of funds,

effective within minutes of the time a payment is initiated. Debit cards or Stored-value

cards are cards have a minimum amount of money to deposit, could also be a loan so it

has to be paid back and are not time sensitive because they make a profit this way in

some cases. Usually credit cards, debit cards or stored-value cards for smaller amounts

than ACH or Fedwire.