ECON 310 Lecture 7: 02.06.17.

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7 Feb 2017

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Lecture Notes 02.06.17
- Chapter 13: Introduction to the Fed (primary monetary policy decision maker)
- Chapter 14: Determination of the Money Supply
*Next two exams will be more typical for econ, use the models you learn about to express some
Liquidity Preference Model - interest rates - influences the levels of economic activity through the level
of loanable funds
Quantity - money supply affects of prices and inflation rates
The FEd is the P by influencing the money supply
The mid 19th century was filed with bank failures: the US used representational currency for gold or
silver issued by private banks
- People valued the money based on belief that their money could be exchanged for gold
- Problematic because the private banks could be close to bankruptcy, but their customers cannot
be sure of just how credible they are
- Took in deposits - borrowed from the customers and charges interest to gain profit
- Banks close to bankruptcy are continually flooded by debt as the people want to
withdraw all of their money from the bad bank
- The bank failures fueled a lot of economic uncertainty and diminished the economic uncertainty
- The people needed to have assurance that the banks would be solvent
- Power was given to the states, so operating outside of the state would be difficult. You would
need to order a charter and then you would issue currency by paying the Michigan bank as well
- People in Michigan and Chicago do not trust insolvencies in each other's banks
- A lot of other states relaxed the rules on bank regulation, so they made the
lightest regulations as possible to attract more banks to their state
- The system of state charter banks of led to a lot the banks were undercapitalized, so
people kept losing their money
- Poorly regulated
- Undercapitalized
National Bank Act - National banking system established in 1863
- Banks could remain as state banks to listen only to , but they would have to give up printing
- The banks would have to apply to the Federal Bank to issue currency now
- They wanted to have a much stricter regulations for the banks
- National banks faced stiffer regulations
Spate of bank runs no abated
- They looked upon England, France, etc. to find a better banking system
- A bank for the bank to make sure all banks keep a nice set of currency at all times
- Central bank - take responsibility itself for issuing currency
- The problem was that the US was focused on deregulation, so this system seemed
antithetical to them
- What happens if the central government is too corrupt?
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