Functions of Money What Backs the Money Supply

Demand for Money
The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms

13
Copyright McGraw-Hill/Irwin, 2005

C HAPTE R

Money and Banking

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FUNCTIONS OF MONEY
Functions of Money What Backs the Money Supply

Demand for Money
The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms

• Medium of Exchange
• Unit of Account • Store of Value
Copyright McGraw-Hill/Irwin, 2005

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2005 .MONEY SUPPLY Functions of Money What Backs the Money Supply Definition… Currency •Token Money •Federal Reserve Notes •Little Intrinsic Value Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Checkable Deposits Previous Slide End Show 13 .3 Next Slide •Commercial Banks •Thrift Institutions Copyright McGraw-Hill/Irwin.

..4 Next Slide Near-monies Savings Deposits • Money Market Deposit Accounts (MMDAs) Smaller Time Deposits Money Market Mutual Funds (MMMFs) Copyright McGraw-Hill/Irwin.MONEY SUPPLY Functions of Money What Backs the Money Supply = Plus. 2005 . Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide End Show 13 .

MONEY SUPPLY Functions of Money What Backs the Money Supply = Plus.5 ... Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Large Time Deposits Illustrated… Next Slide Copyright McGraw-Hill/Irwin. 2005 Previous Slide End Show 13 .

6 Next Slide 2003 Data (billions of dollars) Copyright McGraw-Hill/Irwin.MONEY SUPPLY Functions of Money What Backs the Money Supply Currency (coins & paper money) plus Checkable deposits M1 M2 M3 Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms equals M1 $1236 Previous Slide End Show 13 . 2005 .

7 Next Slide $5899 2003 Data (billions of dollars) Copyright McGraw-Hill/Irwin. 2005 .MONEY SUPPLY Functions of Money What Backs the Money Supply Currency (coins & paper money) plus Checkable deposits M1 M2 M3 Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms equals M1 plus Savings deposits. including MMDA’s plus Small time deposits plus Money market mutual fund (MMMF) balances equals M2 $1236 Previous Slide End Show 13 .

2005 $1236 Previous Slide End Show 13 .MONEY SUPPLY Functions of Money What Backs the Money Supply Currency (coins & paper money) plus Checkable deposits M1 M2 M3 Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms equals M1 plus Savings deposits.8 Next Slide $5899 2003 Data (billions of dollars) $8595 equals M3 . including MMDA’s plus Small time deposits plus Money market mutual fund (MMMF) balances equals M2 plus Large time deposits Copyright McGraw-Hill/Irwin.

2005 .WHAT ABOUT CREDIT CARDS? Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide End Show 13 .9 Next Slide Copyright McGraw-Hill/Irwin.

2005 .10 Next Slide Money as Debt Value of Money • Acceptability • Legal Tender • Relative Scarcity Money and Prices • Purchasing Power of Money • D = 1/Price Level Inflation and Acceptability Copyright McGraw-Hill/Irwin.WHAT BACKS THE MONEY SUPPLY? Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide End Show 13 .

.11 Next Slide .. 2005 Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Stable Value! through. Previous Slide End Show 13 . What Backs the Money Supply? • Appropriate Fiscal Policy • Intelligent Management of the Money Supply – Monetary Policy Copyright McGraw-Hill/Irwin.WHAT BACKS THE MONEY SUPPLY? Functions of Money What Backs the Money Supply So.

12 Next Slide illustrated. Dt varies directly with nominal GDP Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Asset Demand. 2005 Previous Slide End Show 13 . Da varies inversely with the interest rate Liquidity Preference Copyright McGraw-Hill/Irwin...THE DEMAND FOR MONEY Functions of Money What Backs the Money Supply Transactions Demand. .

Dt + Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms 10 7.5 5 2.THE DEMAND FOR MONEY Functions of Money What Backs the Money Supply Rate of interest. 2005 . i (percent) Transactions Demand.13 Next Slide Copyright McGraw-Hill/Irwin.5 Dt 0 0 50 100 150 200 250 300 Amount of money demanded (billions of dollars) Previous Slide End Show 13 .

5 2.14 Next Slide Amount of money demanded (billions of dollars) Copyright McGraw-Hill/Irwin.5 10 7. 2005 .5 Dt 0 0 50 100 150 200 250 300 Da 0 0 50 100 150 200 250 300 Amount of money demanded (billions of dollars) Previous Slide End Show 13 .THE DEMAND FOR MONEY Functions of Money What Backs the Money Supply Rate of interest. Da = Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms 10 7. i (percent) Transactions Demand. i (percent) Asset Demand.5 5 5 2. Dt + Rate of interest.

15 Next Slide Copyright McGraw-Hill/Irwin.5 5 5 5 2. i (percent) Total demand for money.5 2.THE DEMAND FOR MONEY Functions of Money What Backs the Money Supply Rate of interest. Dm Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms 10 7. Dt + Rate of interest. i (percent) Asset Demand.5 Dt 0 0 50 100 150 200 250 300 Da Amount of money demanded (billions of dollars) Dm Amount of money demanded (billions of dollars) 0 0 50 100 150 200 250 300 0 0 50 100 150 200 250 300 Amount of money demanded (billions of dollars) Previous Slide End Show 13 . Da = Rate of interest. 2005 .5 2.5 10 7. i (percent) Transactions Demand.5 10 7.

5 + Asset Demand.16 Next Slide Amount of money demanded (billions of dollars) Equilibrium Interest Rate Copyright McGraw-Hill/Irwin. i (percent) Transactions Demand.5 2. Dm Sm ie Dm Amount of money demanded (billions of dollars) t a 0 50 100 150 200 250 300 0 0 0 50 100 150 200 250 300 0 0 50 100 150 200 250 300 Amount of money demanded (billions of dollars) Previous Slide End Show 13 .5 7. i (percent) Rate of interest. i (percent) Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms 5 2.5 ADD THE MONEY SUPPLY TO FIND THE EQUILIBRIUM RATE OF INTEREST D D 10 7.5 5 5 2.THE DEMAND FOR MONEY Functions of Money What Backs the Money Supply Rate of interest. 2005 .5 10 Rate of interest. Da = Total demand for money. Dt 10 7.

THE MONEY MARKET Functions of Money Rate of interest. Dm 0 50 100 150 200 250 300 Previous Slide End Show 13 . 2005 . i (percent) What Backs the Money Supply Sm 10 7. to $150 billion Sm1.5 0 Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms ie Suppose the money supply is decreased from $200 billion. Sm.17 Next Slide Amount of money demanded (billions of dollars) Copyright McGraw-Hill/Irwin.5 5 2.

THE MONEY MARKET Functions of Money Rate of interest. 2005 .5 5 2. Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms ie Dm 0 50 100 150 200 250 300 Previous Slide End Show 13 .18 Next Slide Amount of money demanded (billions of dollars) Copyright McGraw-Hill/Irwin.5 0 Sm A temporary shortage of money will require the sale of some assets to meet the need. i (percent) What Backs the Money Supply Sm1 10 7.

i (percent) What Backs the Money Supply Sm 10 7.5 0 Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms ie Suppose the money supply is increased from $200 billion.THE MONEY MARKET Functions of Money Rate of interest. Dm 0 50 100 150 200 250 300 Previous Slide End Show 13 . to $250 billion Sm2. 2005 .19 Next Slide Amount of money demanded (billions of dollars) Copyright McGraw-Hill/Irwin.5 5 2. Sm.

5 5 2.5 0 Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms ie A temporary surplus of money will require the purchase of some assets to meet the desired level of liquidity. Dm 0 50 100 150 200 250 300 Previous Slide End Show 13 . i (percent) What Backs the Money Supply Sm Sm2 10 7.20 Next Slide Amount of money demanded (billions of dollars) Copyright McGraw-Hill/Irwin.THE MONEY MARKET Functions of Money Rate of interest. 2005 .

5 as a typical asset assets with to meet the deie sired level of liquidity.5 0 10 Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms with higher interest rates Dm 0 50 100 150 200 250 300 Previous Slide End Show 13 . i (percent) What Backs the Money Supply Sm Sm2 A temporary surplus of money will require Bonds are assumed the purchase of some 7. 5 lower prices associated 2.21 Next Slide Amount of money demanded (billions of dollars) Copyright McGraw-Hill/Irwin.THE MONEY MARKET Functions of Money Rate of interest. 2005 .

Functions of Money What Backs the Money Supply THE FEDERAL RESERVE AND THE BANKING SYSTEM Centralization and Public Control • Board of Governors • Assistance & Advice • Federal Open Market Committee (FOMC) • The 12 Federal Reserve Banks • Central Bank Role • Quasi-Public Banks • Banker’s Banks • Commercial Banks & Thrifts Copyright McGraw-Hill/Irwin. 2005 Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide End Show 13 .22 Next Slide .

THE FEDERAL RESERVE AND THE BANKING SYSTEM Functions of Money What Backs the Money Supply Federal Open Market Committee 12 Federal Reserve Banks Board of Governors Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Commercial Banks Thrift Institutions (Savings & loan associations. credit unions) Previous Slide End Show 13 . mutual savings banks.23 Next Slide The Public (Households and businesses) Copyright McGraw-Hill/Irwin. 2005 .

24 Next Slide • Issuing Currency • Setting Reserve Requirements & Holding Reserves • Lending Money to Banks & Thrifts •Discount Rate • Providing for Check Collection • Acting as Fiscal Agent • Supervising Banks • Controlling the Money Supply Copyright McGraw-Hill/Irwin. 2005 .FED Functions & the Money Supply Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide End Show 13 .

25 Next Slide Copyright McGraw-Hill/Irwin. 2005 .FED Functions & the Money Supply Functions of Money What Backs the Money Supply Federal Reserve Independence Recent Developments • Relative Decline of Banks and Thrifts • Financial Services Industry • Consolidation Among Banks and Thrifts • Convergence of Services Provided by Financial Institutions • Globalization of Financial Markets • Electronic Transactions Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide End Show 13 .

medium of exchange unit of account store of value M1. M2. Inc. M3 token money Federal Reserve Notes checkable deposits commercial banks thrift institutions near-monies savings account money market deposit account (MMDA) time deposits Copyright McGraw-Hill/Irwin. 2005 money market mutual fund (MMMF) legal tender transactions demand asset demand total demand for money money market Federal Reserve System Board of Governors Federal Open Market Committee (FOMC) Federal Reserve Banks financial services industry electronic transactions BACK END .

2005 .Coming up next.. Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms How Banks and Thrifts Create Money Previous Slide End Show 13 ..27 Next Slide Chapter 14 Copyright McGraw-Hill/Irwin.