copyright 2008 the mcgraw-hill companies 12-1 money defined money supply federal reserve system...
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Copyright 2008 The McGraw-Hill Companies12-1
Money Defined
Money Supply
Federal Reserve System
Financial Institutions
Last Word
Key Terms
End Show
12Money andBanking
Copyright 2008 The McGraw-Hill Companies12-2
Money Defined
Money Supply
Federal Reserve System
Financial Institutions
Last Word
Key Terms
End Show
Chapter Objectives• The Functions of Money and
the Components of the U.S. Money Supply
• What “Backs” the Money Supply, Making Us Willing to Accept It?
• The Makeup of the Federal Reserve and the U.S. Banking System
• The Functions and Responsibilities of the Federal Reserve
Copyright 2008 The McGraw-Hill Companies12-3
Money Defined
Money Supply
Federal Reserve System
Financial Institutions
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Key Terms
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Money Defined• The Functions of Money
–Medium of Exchange–Unit of Account–Store of Value
• Components of the Money Supply–Currency–Checkable Deposits–Other Liquid Savings
Deposits
Copyright 2008 The McGraw-Hill Companies12-4
Money Defined
Money Supply
Federal Reserve System
Financial Institutions
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Money Defined• Currency
–Coins and Paper Money–Token Money–Federal Reserve Notes
• Checkable Deposits–Commercial Banks–Thrift Institutions
• A Qualification–Government, Federal
Reserve, and Banks Excluded from M1
Copyright 2008 The McGraw-Hill Companies12-5
Money Defined
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Federal Reserve System
Financial Institutions
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Money Defined• M1
–Currency–Checkable Deposits
• M2–Near-Monies–Savings Deposits Including
Money Market Deposit Accounts (MMDA)
–Small Time Deposits–Money Market Mutual Funds
(MMMF)
Copyright 2008 The McGraw-Hill Companies12-6
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Money DefinedM1 M254%
46%M120%
Savings DepositsIncluding Money Market
Deposit Accounts (MMDA)
Small Time Deposits
Money Market MutualFunds Held By Individuals
(MMMF)
Currency
Checkable Deposits
15%
11%
54%
$1,375Billion
$6,758Billion
February 2006
Totals
++
+
+
+
Copyright 2008 The McGraw-Hill Companies12-7
Money Defined
Money Supply
Federal Reserve System
Financial Institutions
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Money Defined• Money Definition MZM
– Money Zero Maturity– Immediately Available– From M2 Subtract Small Time
Deposits– Add Back Money Market Mutual
Funds Owned by Businesses (MMMF)
– Slightly Larger than M2– February 2005 M2 was $6,758
Billion and MZM was $6,934 Billion
Copyright 2008 The McGraw-Hill Companies12-8
Money Defined
Money Supply
Federal Reserve System
Financial Institutions
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Key Terms
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Money Supply• Are Credit Cards Money?
• What “Backs” the Money Supply?
• Stable Value of Money
• Money as Debt–Acceptability
–Legal Tender
–Relative Scarcity
Copyright 2008 The McGraw-Hill Companies12-9
Money Defined
Money Supply
Federal Reserve System
Financial Institutions
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Money Supply• Money and Prices
– Purchasing Power of the Dollar
$V = 1/P– Inflation and Acceptability
• Stabilizing Money’s Purchasing Power– Intelligent Management of the
Money Supply – Monetary Policy
– Appropriate Fiscal Policy
Copyright 2008 The McGraw-Hill Companies12-10
Money Defined
Money Supply
Federal Reserve System
Financial Institutions
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Federal Reserve System
• The Federal Reserve and the Banking System
–Historical Background
–Board of Governors
–Federal Open Market Committee (FOMC)
• Open Market Operations
Copyright 2008 The McGraw-Hill Companies12-11
Money Defined
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Federal Reserve System
Financial Institutions
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Federal Reserve SystemFramework of the Federal Reserve
System and the Relationship to the Public
Commercial BanksThrift Institutions
(Savings and Loan Associations,Mutual Savings Banks,
Credit Unions)
The Public(Households and
Businesses)
12 Federal Reserve Banks
Board of Governors
Federal Open Market Committee
Copyright 2008 The McGraw-Hill Companies12-12
Money Defined
Money Supply
Federal Reserve System
Financial Institutions
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Federal Reserve SystemThe 12 Federal Reserve Banks
Source: Federal Reserve Bulletin
Copyright 2008 The McGraw-Hill Companies12-13
Money Defined
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Federal Reserve System
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Federal Reserve SystemThe 12 Federal Reserve Banks
• Private and Public Control
• Central Bank
• Quasi-Public Banks
• Banker’s Banks
• Commercial Banks and Thrifts
Copyright 2008 The McGraw-Hill Companies12-14
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Federal Reserve System
Financial Institutions
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Federal Reserve SystemFed Functions and the Money Supply• Issuing Currency• Setting Reserve Requirements
and Holding Reserves• Lending Money to Banks and
Thrifts–Discount Rate
• Check Collection• Fiscal Agent for U.S.• Supervising Banks• Controlling the Money Supply
Copyright 2008 The McGraw-Hill Companies12-15
Money Defined
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Federal Reserve System
Financial Institutions
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Federal Reserve SystemFed Functions and the Money Supply• Federal Reserve Independence• Recent Developments
– Relative Decline of Banks and Thrifts
– Consolidation Among Banks and Thrifts
– Convergence of Services Provided by Financial Institutions
– Globalization of Financial Markets– Electronic Payments
Copyright 2008 The McGraw-Hill Companies12-16
Money Defined
Money Supply
Federal Reserve System
Financial Institutions
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Financial Institutions
• Barclays (U.K.)• UBS (Switzerland)• Citigroup (U.S.)• ING Group (Netherland)• Mizuho Financial (Japan)• Allianz Worldwide (Germany)• Bank of America (U.S.)• HSBC Group (U.K.)• BNP Paribus (France)• JPMorgan Chase (U.S.)• Deutsche Bank Group (Germany)• Royal Bank of Scotland (U.K.)
World’s Largest Financial Institutions
Source: Forbes Global 2000
$1,587,0611,519,3991,494,0371,369,5461,325,2271,300,6481,291,7951,274,2191,227,9511,198,9421,134,8261,119,901
2005 Assets (Millions of U.S. Dollars)
GLOBAL PERSPECTIVE
Copyright 2008 The McGraw-Hill Companies12-17
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Financial Institutions
• Commercial Banks
• Thrifts
• Insurance Companies
• Mutual Fund Companies
• Pension Funds
• Securities Firms
Major U.S. Financial Institutions
Copyright 2008 The McGraw-Hill Companies12-18
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Federal Reserve System
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The Global Greenback
• U.S. Currency Circulating Abroad– Russians $40 Billion– Argentineans $7 Billion– Polish $6 Billion
• U.S. Profits from Dollars Leaving• Black Markets and Illegal
Activities• Seeking Stable Purchasing Power
– Soviet Union Collapse– Brazil Inflation Issues– Asian Market Exchanges
Last
Word
Copyright 2008 The McGraw-Hill Companies12-19
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The Global Greenback
• Financial Risks–Exchange-Rate Risk–Upside Opportunity
• Global Greenback a Positive Economic Force
• Results in Increased Output and Income Globally
Last
Word
Copyright 2008 The McGraw-Hill Companies12-20
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Federal Reserve System
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Key Terms• medium of exchange• unit of account• store of value• M1• token money• Federal Reserve Note
s• checkable deposits• commercial banks• thrift institutions• near-monies• M2• savings account• money market deposi
t account (MMDA)
• time deposits• money market mutual
fund (MMMF)• MZM• legal tender• Federal Reserve Syst
em• Board of Governors• Federal Reserve
Banks• Federal Open Market
Committee (FOMC)• financial services
industry• electronic payments
Copyright 2008 The McGraw-Hill Companies12-21
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Federal Reserve System
Financial Institutions
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Money Creation