copyright mcgraw-hill, inc. 1999 money & banking functions of money supply of money demand for...
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Copyright McGraw-Hill, Inc Functions of Money Medium of Exchange Unit of Account Medium of Exchange Unit of AccountTRANSCRIPT
Copyright McGraw-Hill, Inc. 1999
Money & Banking
FUNCTIONS OF MONEYSUPPLY OF MONEY
DEMAND FOR MONEYMONEY MARKET
U.S. FINANCIAL SYSTEM
CHAPTER THIRTEEN
Copyright McGraw-Hill, Inc. 1999
Functions of Money• Medium of Exchange
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Functions of Money• Medium of Exchange
• Unit of Account
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Functions of Money• Medium of Exchange
• Unit of Account
• Store of Value
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Money Definition
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Money Definition
Currency•Token Money•Intrinsic Value
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Money Definition
Currency•Token Money•Intrinsic Value
Federal Reserve Notes
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Money Definition
Currency•Token Money•Intrinsic Value
Checkable Deposits•Commercial Banks•Thrift Institutions•Savings & Loan Associations
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Money Definition
Currency•Token Money•Intrinsic Value
Checkable Deposits•Commercial Banks•Thrift Institutions•Savings & Loan Associations
Mutual Savings Banks
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Money Definition
Currency•Token Money•Intrinsic Value
Checkable Deposits•Commercial Banks•Thrift Institutions•Savings & Loan Associations
Mutual Savings BanksCredit Unions
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Money Definition= Plus...
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Money Definition
Near-monies= Plus...
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Money Definition
Near-moniesNoncheckable Savings
Accounts
= Plus...
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Money Definition
Near-moniesNoncheckable Savings
AccountsMoney Market Deposit
Accounts
= Plus...
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Money Definition
Near-moniesNoncheckable Savings
AccountsMoney Market Deposit
AccountsTime Deposits
= Plus...
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Money Definition
Near-moniesNoncheckable Savings
AccountsMoney Market Deposit
AccountsTime DepositsMoney Market Mutual Funds
= Plus...
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Money Definition
Large Time Deposits
= Plus...
Specifically in 1997...
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The Supply of MoneyCurrency (coins & paper money) plus Checkable deposits
1997 Data(billions of dollars)
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The Supply of MoneyCurrency (coins & paper money) plus Checkable depositsequals M1M1
M1$1057
1997 Data(billions of dollars)
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The Supply of MoneyCurrency (coins & paper money) plus Checkable depositsequals M1M1 plus Noncheckable savings deposits, including MMDA’s plus Small time deposits plus Money market mutual fund balances (MMMF’s)
M1$1057
1997 Data(billions of dollars)
Copyright McGraw-Hill, Inc. 1999
The Supply of MoneyCurrency (coins & paper money) plus Checkable depositsequals M1M1 plus Noncheckable savings deposits, including MMDA’s plus Small time deposits plus Money market mutual fund balances (MMMF’s)equals M2M2
M1 M2$1057
1997 Data(billions of dollars)
$3964
Copyright McGraw-Hill, Inc. 1999
The Supply of MoneyCurrency (coins & paper money) plus Checkable depositsequals M1M1 plus Noncheckable savings deposits, including MMDA’s plus Small time deposits plus Money market mutual fund balances (MMMF’s)equals M2M2 plus Large time deposits
M1 M2$1057
1997 Data(billions of dollars)
$3964
Copyright McGraw-Hill, Inc. 1999
The Supply of MoneyCurrency (coins & paper money) plus Checkable depositsequals M1M1 plus Noncheckable savings deposits, including MMDA’s plus Small time deposits plus Money market mutual fund balances (MMMF’s)equals M2M2 plus Large time depositsequals M3M3
M1 M2 M3$1057
1997 Data(billions of dollars)
$3964
$5205
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What about credit cards?What about credit cards?
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What Backs the Money Supply?
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What Backs the Money Supply?• Money as Debt
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What Backs the Money Supply?• Money as Debt• Value of Money
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What Backs the Money Supply?• Money as Debt• Value of Money
• Acceptability
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What Backs the Money Supply?• Money as Debt• Value of Money
• Acceptability• Legal Tender
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What Backs the Money Supply?• Money as Debt• Value of Money
• Acceptability• Legal Tender
•Fiat Money
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What Backs the Money Supply?• Money as Debt• Value of Money
• Acceptability• Legal Tender• Relative Scarcity
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What Backs the Money Supply?• Money as Debt• Value of Money
• Acceptability• Legal Tender• Relative Scarcity
• Money and Prices
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What Backs the Money Supply?• Money as Debt• Value of Money
• Acceptability• Legal Tender• Relative Scarcity
• Money and Prices• Value of the Dollar
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What Backs the Money Supply?• Money as Debt• Value of Money
• Acceptability• Legal Tender• Relative Scarcity
• Money and Prices• Value of the Dollar
NOTES:Reciprocal relationshipbetween the price leveland the value of thedollar.
D =1
P
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What Backs the Money Supply?• Money as Debt• Value of Money
• Acceptability• Legal Tender• Relative Scarcity
• Money and Prices• Value of the Dollar
• Inflation and Acceptability
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Maintaining Money’s ValueWhat backs the money supply?
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Maintaining Money’s ValueWhat backs the money supply?
Stable Value!through....
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Maintaining Money’s ValueWhat backs the money supply?
Stable Value!through....
• Appropriate fiscal policy
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Maintaining Money’s ValueWhat backs the money supply?
Stable Value!through....
• Appropriate fiscal policy• Intelligent management of the money supply
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The Demand For Money
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The Demand For MoneyTransactions Demand, D1
varies directly with nominal GDP
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The Demand For MoneyTransactions Demand, D1
varies directly with nominal GDP
Asset Demand, D2
varies inversely with the interest rateillustrated....
TransactionsDemand, Dt +
Rat
e of
inte
rest
, i (p
erce
nt)
Amount of moneydemanded (billions
of dollars)
Dt
10
7.5
5
2.5
00 50 100 150 200 250 300
The Demand For Money
Copyright McGraw-Hill, Inc. 1999
TransactionsDemand, Dt
AssetDemand, Da+ =
Rat
e of
inte
rest
, i (p
erce
nt)
Rat
e of
inte
rest
, i (p
erce
nt)
Amount of moneydemanded (billions
of dollars)
Amount of moneydemanded (billions
of dollars)
Dt
10
7.5
5
2.5
0
10
7.5
5
2.5
0Da
0 50 100 150 200 250 300 0 50 100 150 200 250 300
The Demand For Money
Copyright McGraw-Hill, Inc. 1999
TransactionsDemand, Dt
AssetDemand, Da
Total demandfor money, Dm+ =
Rat
e of
inte
rest
, i (p
erce
nt)
Rat
e of
inte
rest
, i (p
erce
nt)
Rat
e of
inte
rest
, i (p
erce
nt)
Amount of moneydemanded (billions
of dollars)
Amount of moneydemanded (billions
of dollars)
Amount of moneydemanded (billions
of dollars)
0 50 100 150 200 250 300
Dt
10
7.5
5
2.5
0
10
7.5
5
2.5
0
10
7.5
5
2.5
0Da
0 50 100 150 200 250 300 0 50 100 150 200 250 300
Dm
The Demand For Money
Copyright McGraw-Hill, Inc. 1999
TransactionsDemand, Dt
AssetDemand, Da
Total demandfor money, Dm+ =
Rat
e of
inte
rest
, i (p
erce
nt)
Rat
e of
inte
rest
, i (p
erce
nt)
Rat
e of
inte
rest
, i (p
erce
nt)
Amount of moneydemanded (billions
of dollars)
Amount of moneydemanded (billions
of dollars)
Amount of moneydemanded (billions
of dollars)
0 50 100 150 200 250 300
Dt
10
7.5
5
2.5
0
10
7.5
5
2.5
0
10
7.5
5
2.5
0Da
0 50 100 150 200 250 300 0 50 100 150 200 250 300
Dm
ADD THEMONEY SUPPLY
TO FIND THEEQUILIBRIUM RATE
OF INTEREST
The Demand For Money
Copyright McGraw-Hill, Inc. 1999
TransactionsDemand, Dt
AssetDemand, Da
Total demandfor money, Dm+ =
Rat
e of
inte
rest
, i (p
erce
nt)
Rat
e of
inte
rest
, i (p
erce
nt)
Rat
e of
inte
rest
, i (p
erce
nt)
Amount of moneydemanded (billions
of dollars)
Amount of moneydemanded (billions
of dollars)
Amount of moneydemanded (billions
of dollars)
0 50 100 150 200 250 300
Dt
10
7.5
5
2.5
0
10
7.5
5
2.5
0
10
7.5
5
2.5
0Da
0 50 100 150 200 250 300 0 50 100 150 200 250 300
Sm
Dm
EquilibriumEquilibriumInterest RateInterest Rate
ie
The Demand For Money
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Copyright McGraw-Hill, Inc. 1999
The Money Market
Rat
e of
inte
rest
, i (p
erce
nt)
Amount of money demanded(billions of dollars)
10
7.5
5
2.5
0
Sm
Dm
ie
Suppose the moneysupply is decreasedfrom $200 billion, Sm,
to $150 billion Sm1.
0 50 100 150 200 250 300
Copyright McGraw-Hill, Inc. 1999
Rat
e of
inte
rest
, i (p
erce
nt)
Amount of money demanded(billions of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Dm
ie
SmA temporary shortageof money will requirethe sale of some assetsto meet the need.
Sm1
The Money Market
Copyright McGraw-Hill, Inc. 1999
Rat
e of
inte
rest
, i (p
erce
nt)
Amount of money demanded(billions of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Dm
ie
SmA temporary shortageof money will requirethe sale of some assetsto meet the need.
Sm1
Bonds are assumedas a typical asset with
lower prices associatedwith higher
interest rates
The Money Market
Copyright McGraw-Hill, Inc. 1999
Rat
e of
inte
rest
, i (p
erce
nt)
Amount of money demanded(billions of dollars)
10
7.5
5
2.5
0
Dm
iiee
After adjustments toasset holdings, a newequilibrium will beseen at a higher levelof interest.
Sm1
0 50 100 150 200 250 300
The Money Market
Copyright McGraw-Hill, Inc. 1999
Rat
e of
inte
rest
, i (p
erce
nt)
Amount of money demanded(billions of dollars)
10
7.5
5
2.5
0
Dm
ie
Sm
0 50 100 150 200 250 300
Suppose the moneysupply is increasedfrom $200 billion, Sm,
to $250 billion Sm2.
The Money Market
Copyright McGraw-Hill, Inc. 1999
Rat
e of
inte
rest
, i (p
erce
nt)
Amount of money demanded(billions of dollars)
10
7.5
5
2.5
0
Dm
ie
Sm Sm2
0 50 100 150 200 250 300
A temporary surplusof money will requirethe purchase of someassets to meet the de-sired level of liquidity.
The Money Market
Copyright McGraw-Hill, Inc. 1999
Rat
e of
inte
rest
, i (p
erce
nt)
Amount of money demanded(billions of dollars)
10
7.5
5
2.5
0Dm
ie
Sm2
0 50 100 150 200 250 300
After adjustments toasset holdings, a newequilibrium will beseen at a lower levelof interest.
The Money Market
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The United States Financial System
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The Federal Reserve SystemThe United States Financial System
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The Federal Reserve System• Board of Governors
The United States Financial System
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The Federal Reserve System• Board of Governors• Assistance & Advice
The United States Financial System
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The Federal Reserve System• Board of Governors• Assistance & Advice
• Federal Open Market Committee
The United States Financial System
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The Federal Reserve System• Board of Governors• Assistance & Advice
• Federal Open Market Committee• Three Advisory Councils
The United States Financial System
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The Federal Reserve System• Board of Governors• Assistance & Advice
• Federal Open Market Committee• Three Advisory Councils
• The Twelve Federal Reserve Banks
The United States Financial System
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The Federal Reserve System• Board of Governors• Assistance & Advice
• Federal Open Market Committee• Three Advisory Councils
• The Twelve Federal Reserve Banks• Central Bank Role
The United States Financial System
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The Federal Reserve System• Board of Governors• Assistance & Advice
• Federal Open Market Committee• Three Advisory Councils
• The Twelve Federal Reserve Banks• Central Bank Role• Quasipublic Banks
The United States Financial System
Copyright McGraw-Hill, Inc. 1999
The Federal Reserve System• Board of Governors• Assistance & Advice
• Federal Open Market Committee• Three Advisory Councils
• The Twelve Federal Reserve Banks• Central Bank Role• Quasipublic Banks• Banker’s Banks
The United States Financial System
Copyright McGraw-Hill, Inc. 1999
The Federal Reserve System• Board of Governors• Assistance & Advice
• Federal Open Market Committee• Three Advisory Councils
• The Twelve Federal Reserve Banks• Central Bank Role• Quasipublic Banks• Banker’s Banks
• Commercial Banks & Thrifts
The United States Financial System
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FED Functions and the Money Supply
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FED Functions and the Money Supply • Issuing Currency
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FED Functions and the Money Supply • Issuing Currency• Setting Reserve Requirements &
Holds Reserves
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FED Functions and the Money Supply • Issuing Currency• Setting Reserve Requirements &
Holds Reserves• Lending Money to Banks & Thrifts
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FED Functions and the Money Supply • Issuing Currency• Setting Reserve Requirements &
Holds Reserves• Lending Money to Banks & Thrifts• Check Collection
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FED Functions and the Money Supply • Issuing Currency• Setting Reserve Requirements &
Holds Reserves• Lending Money to Banks & Thrifts• Check Collection• Fiscal Agents for the Federal
Government
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FED Functions and the Money Supply • Issuing Currency• Setting Reserve Requirements &
Holds Reserves• Lending Money to Banks & Thrifts• Check Collection• Fiscal Agents for the Federal
Government• Supervision of Member Banks
Copyright McGraw-Hill, Inc. 1999
FED Functions and the Money Supply • Issuing Currency• Setting Reserve Requirements &
Holds Reserves• Lending Money to Banks & Thrifts• Check Collection• Fiscal Agents for the Federal
Government• Supervision of Member Banks• Control of the Money SupplyControl of the Money Supply
Copyright McGraw-Hill, Inc. 1999
FED Functions and the Money Supply • Issuing Currency• Setting Reserve Requirements &
Holds Reserves• Lending Money to Banks & Thrifts• Check Collection• Fiscal Agents for the Federal
Government• Supervision of Member Banks• Control of the Money SupplyControl of the Money Supply
NOTES:Federal ReserveIndependence fromFederal Government
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Recent Developments• Relative Decline of Banks & Thrifts
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Recent Developments• Relative Decline of Banks & Thrifts• Expansion of Services
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Recent Developments• Relative Decline of Banks & Thrifts• Expansion of Services• Mergers
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Recent Developments• Relative Decline of Banks & Thrifts• Expansion of Services• Mergers• Regulatory Reform
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Recent Developments• Relative Decline of Banks & Thrifts• Expansion of Services• Mergers• Regulatory Reform• Market Globalization
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Recent Developments• Relative Decline of Banks & Thrifts• Expansion of Services• Mergers• Regulatory Reform• Market Globalization• Electronic Money
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Recent Developments• Relative Decline of Banks & Thrifts• Expansion of Services• Mergers• Regulatory Reform• Market Globalization• Electronic Money
• E-Cash
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Recent Developments• Relative Decline of Banks & Thrifts• Expansion of Services• Mergers• Regulatory Reform• Market Globalization• Electronic Money
• E-Cash• Smart Cards
Copyright McGraw-Hill, Inc. 1999
Recent Developments• Relative Decline of Banks & Thrifts• Expansion of Services• Mergers• Regulatory Reform• Market Globalization• Electronic Money
• E-Cash• Smart Cards
Questionsand
Discussion
medium of exchange unit of account store of value M1, M2, M3 token money intrinsic value Federal Reserve Notes checkable deposits thrift (savings) institutions savings & loan associations mutual savings banks credit unions near-monies noncheckable deposits money market deposit account
time deposits money market mutual fund legal tender fiat money transactions demand asset demand total demand for money money market Federal Reserve System Board of Governors Federal Open Market Committee Advisory Councils Federal Reserve Banks commercial banks E-cash smart cards
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How Banks Create MoneyHow Banks Create Money
Chapter 14
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