Money and Banking

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
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Money and Banking
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

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MONEY SUPPLY
Definition
Currency
Token Money Federal Reserve Notes Little Intrinsic Value Commercial Banks Thrift Institutions
Checkable Deposits
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MONEY SUPPLY
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Near-monies Savings Deposits Money Market Deposit Accounts (MMDAs) Smaller Time Deposits Money Market Mutual Funds (MMMFs)
Plus...
MONEY SUPPLY
Plus...
Large Time Deposits
Illustrated
Next Slide
MONEY SUPPLY
Currency (coins & paper money) plus Checkable deposits
M1 M2 M3
equals M1
$1236
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2003 Data (billions of dollars)

MONEY SUPPLY
M1 M2 M3
equals M1
plus Savings deposits,

including MMDAs plus Small time deposits plus Money market mutual fund (MMMF) balances equals M2
$1236
Next Slide
$5899 2003 Data (billions of dollars)
MONEY SUPPLY
M1 M2 M3
equals M1
plus Savings deposits,

including MMDAs plus Small time deposits plus Money market mutual fund (MMMF) balances equals M2 equals M3 plus Large time deposits
$1236
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$5899 2003 Data (billions of dollars) $8595
WHAT ABOUT CREDIT CARDS?

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WHAT BACKS THE MONEY SUPPLY?

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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
WHAT BACKS THE MONEY SUPPLY?

So, What Backs the Money Supply?
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Appropriate Fiscal Policy Intelligent Management of the Money Supply Monetary Policy
Stable Value! through...
THE DEMAND FOR MONEY

Transactions Demand, Dt Asset Demand, Da
varies directly with nominal GDP varies inversely with the interest rate Liquidity Preference
Next Slide
illustrated...

Functions of Money What Backs the Money Supply
Rate of interest, i (percent)
Transactions Demand, Dt
10 7.5 5 2.5
Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms
Dt
Amount of money demanded (billions of dollars)
0 0 50 100 150 200 250 300
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10 7.5 5 2.5
+
Asset Demand, Da
10 7.5 5 2.5
Dt
0 0 50 100 150 200 250 300
0 0 50 100 150 200 250 300
Da
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10 7.5 5 2.5
+
Asset Demand, Da
10 7.5 5 2.5
=
Total demand for money, Dm

10 7.5 5 2.5
Dt
0 0 50 100 150 200 250 300
0 0 50 100 150 200 250 300
Da
Dm
0 0 50 100 150 200 250 300
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10 7.5 5 2.5 0
The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms
10
Demand for Money
ADD THE MONEY SUPPLY TO FIND THE EQUILIBRIUM RATE OF INTEREST D D

10 7.5 5 7.5 5 2.5 2.5
Asset Demand, Da
Total demand for money, Dm Sm
ie
Dm
0 50 100 150 200 250 300
0 0 50 100 150 200 250 300
0 0 50 100 150 200 250 300
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Equilibrium Interest Rate

THE MONEY MARKET

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
10 7.5 5 2.5 0
Sm
ie
Suppose the money supply is decreased from $200 billion, Sm, to $150 billion Sm1.
Dm
0 50 100 150 200 250 300
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THE MONEY MARKET

Functions of Money
10 7.5 5 2.5 0
Sm1
Sm
A temporary shortage of money will require the sale of some assets to meet the need.
ie
Dm
0 50 100 150 200 250 300
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THE MONEY MARKET

Functions of Money
10 7.5 5 2.5 0
Sm
ie
Suppose the money supply is increased from $200 billion, Sm, to $250 billion Sm2.
Dm
0 50 100 150 200 250 300
Next Slide

THE MONEY MARKET

Functions of Money
10 7.5 5 2.5 0
Sm Sm2
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
Next Slide

THE MONEY MARKET

Functions of Money
A temporary surplus of money will require Bonds are assumed the purchase of some 7.5 as a typical asset assets to meet the dewith ie sired level of liquidity. 5 lower prices associated
2.5 0
10
Sm Sm2
with higher interest rates Dm

100 150 200 250 300
50
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Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal

Previous Slide End Show 13 - 1

Money and Banking

Medium of Exchange Unit of Account Store of Value

Previous Slide End Show 13 - 2

Previous Slide End Show 13 - 3

Copyright McGraw-Hill/Irwin, 2005

Previous Slide End Show 13 - 4

Large Time Deposits

Previous Slide End Show 13 - 5

Currency (coins & paper money) plus Checkable deposits

Previous Slide End Show 13 - 6

2003 Data (billions of dollars)

Currency (coins & paper money) plus Checkable deposits

plus Savings deposits,

Previous Slide End Show 13 - 7

$5899 2003 Data (billions of dollars)

Copyright McGraw-Hill/Irwin, 2005

Currency (coins & paper money) plus Checkable deposits

plus Savings deposits,

Previous Slide End Show 13 - 8

$5899 2003 Data (billions of dollars) $8595

WHAT ABOUT CREDIT CARDS?

Previous Slide End Show 13 - 9

Copyright McGraw-Hill/Irwin, 2005

WHAT BACKS THE MONEY SUPPLY?

Previous Slide End Show 13 - 10

Copyright McGraw-Hill/Irwin, 2005

WHAT BACKS THE MONEY SUPPLY?

So, What Backs the Money Supply?

Previous Slide End Show 13 - 11

Copyright McGraw-Hill/Irwin, 2005

Stable Value! through...

THE DEMAND FOR MONEY

Transactions Demand, Dt Asset Demand, Da

Previous Slide End Show 13 - 12

Copyright McGraw-Hill/Irwin, 2005

THE DEMAND FOR MONEY

0 0 50 100 150 200 250 300

Previous Slide End Show 13 - 13

Copyright McGraw-Hill/Irwin, 2005

THE DEMAND FOR MONEY

0 0 50 100 150 200 250 300

0 0 50 100 150 200 250 300

Previous Slide End Show 13 - 14

Amount of money demanded (billions of dollars)

Copyright McGraw-Hill/Irwin, 2005

THE DEMAND FOR MONEY

Total demand for money, Dm

0 0 50 100 150 200 250 300

0 0 50 100 150 200 250 300

0 0 50 100 150 200 250 300

Previous Slide End Show 13 - 15

Amount of money demanded (billions of dollars)

Copyright McGraw-Hill/Irwin, 2005

THE DEMAND FOR MONEY

Rate of interest, i (percent)

Rate of interest, i (percent)

Demand for Money

ADD THE MONEY SUPPLY TO FIND THE EQUILIBRIUM RATE OF INTEREST D D

Total demand for money, Dm Sm

0 50 100 150 200 250 300

0 0 50 100 150 200 250 300