the money supply and the banking system outline: what counts as money? measuring the money stock...
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The Money Supply and theBanking System
Outline:
• What counts as money?
• Measuring the money stock
• Financial intermediaries
• The typical bank balance sheet
• The fractional reserve system
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An asset is considered
liquid if it can be converted
to cash quickly and with little
cost
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LeastLiquid
MostLiquid
Bonds,Equities
SpecializedEquipment
Home Equity
Oriental Rugs, Jewelry
Farm LandMoney
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Cash in circulation
($521 billion)
Checkable deposits
($587 billion)+TravelersChecks
($8 billion)
Savingsaccounts($1,737 billion) Money
MarketMutualFunds
($873 billion)
Monetary AssetsJanuary 31, 2000
Small TimeDeposits
($963 billion)
Large TimeDeposits
($716 billion)
Most Liquid
Least Liquid
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M1 includes
•Currency in circulation
•Traveler’s checks
•Checkable deposits at commercial banks
•Other checkable deposits (OCDs)1
1Includes NOW, ATS, credit union share draft accounts, and demand deposits
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9.2 / .8%
237.2 / 21.6%
326.7 / 29.8%
523.2 / 47.7%
Travelers' Checks
OCDs
Demand deposits
Currency
Source: Federal Reserve Bulletin
OCDs means “other checkable deposits.”
Components of M1, July 17, 2000 (in billions)
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M2 includes
•M1
•Savings deposits
•Small time deposits
•Money market mutual funds (MMMFs)
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3694.4 / 48.6%
1016.0 / 13.4%
1799.2 / 23.7%
1096.3 / 14.4%
MMMFs
Small time deposits
Savings deposits
M1Components of M2, July 17, 2000 (in billions of dollars)
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Financial Intermediaries
We use this to term to describe businesses that specialize in brokering between depositors (savers) and borrowers.
Institutions that are permitted by law to hold checkable deposits include:
1. Savings and loan associations (S & L’s)
2. Mutual savings banks
3. Credit unions
4. Commercial banks
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Assets Amount ($) Liabilities and Net Worth Amount ($)Property and buildings $20 million Demand deposits $100 millionGovernment bonds $25 million Net worth $20 millionLoans $65 millionCash in vault $2 millionReserves on account $8 millionTotal assets $120 million Total Liabilities + Net Worth $120 million
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Depository institutions are required by law to hold a minimum fraction of their deposit liabilities in a non-interest bearing account at the Federal Reserve Bank
Legislation
•Federal Reserve Act of 1913
•DIDMCA of 1982
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•Total reserves: Vault cash plus reserves on account at the Federal Reserve Bank (the “Fed”).
•Required reserves: The minimum amount a reserves a bank must hold to comply with the legal reserve requirement.
•Required reserve ratio: The minimum fraction of checking account balances (or deposit liabilities) that bank must hold as reserves.
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Type of Deposit Minimum required reserve (%)
Very large checkable deposits (over $54
million)
3
Other checkable deposits 10 All other deposits 0
Source: Federal Reserve Board
Reserve Requirements in the U.S.