UNIVERSAL COLLEGE OF ENGINEERING & TECHNOLOGY

•ENGINEERING ECONOMICS & MANAGEMENT

SUBJECT-

EC 3RD SEMANUPRIYA KASHYAP

130460111001GUIDED BY

SHITAL SHASTRI

Money and Banking

FUNCTIONS OF MONEY

• Medium of Exchange

• Unit of Account

• Store of Value

MONEY SUPPLY

Currency•Token Money•Federal Reserve Notes•Little Intrinsic Value

Checkable Deposits•Commercial Banks•Thrift Institutions

Definition…

MONEY SUPPLY

= Plus...Near-moniesSavings Deposits

• Money Market Deposit Accounts (MMDAs)

Smaller Time DepositsMoney Market Mutual Funds

(MMMFs)

MONEY SUPPLY

= Plus...Large Time Deposits

Illustrated…

Currency (coins & paper money)

plus Checkable deposits

equals M1

M1 M2 M3

$1236

2003 Data(billions of dollars)

MONEY SUPPLY

M1 M2 M3

$1236

2003 Data(billions of dollars)

$5899

MONEY SUPPLY

Currency (coins & paper money)

plus Checkable deposits

equals M1

plus Savings deposits,

including MMDA’s plus Small time deposits plus Money market mutual fund (MMMF) balances

equals M2

M1 M2 M3

$1236

2003 Data(billions of dollars)

$5899

$8595

MONEY SUPPLYCurrency (coins & paper money)

plus Checkable deposits

equals M1

plus Savings deposits,

including MMDA’s plus Small time deposits plus Money market mutual fund (MMMF) balances

equals M2 plus Large time deposits

equals M3

Currency (coins & paper money)

plus Checkable deposits

equals M1

plus Savings deposits,

including MMDA’s plus Small time deposits plus Money market mutual fund (MMMF) balances

equals M2

WHAT ABOUT CREDIT CARDS?

WHAT BACKS THE MONEY SUPPLY?

Money as DebtValue 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?Stable Value!

through...• Appropriate Fiscal Policy• Intelligent Management of the

Money Supply – Monetary Policy

THE DEMAND FOR MONEY

Transactions Demand, Dt

varies directly with nominal GDP

Asset Demand, Da

varies inversely with the interest rateLiquidity Preference

illustrated...

+TransactionsDemand, Dt

Ra

te o

f in

tere

st,

i (

pe

rce

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

+ =TransactionsDemand, Dt

AssetDemand, Da

Ra

te o

f in

tere

st,

i (

pe

rce

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

Ra

te o

f in

tere

st,

i (

pe

rce

nt)

Amount of moneydemanded (billions

of dollars)

10

7.5

5

2.5

0

Da

0 50 100 150 200 250 300

+ =TransactionsDemand, Dt

AssetDemand, Da

Total demandfor money, Dm

0 50 100 150 200 250 300

Ra

te o

f in

tere

st,

i (

pe

rce

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

Ra

te o

f in

tere

st,

i (

pe

rce

nt)

Amount of moneydemanded (billions

of dollars)

10

7.5

5

2.5

0

Da

Ra

te o

f in

tere

st,

i (

pe

rce

nt)

Amount of moneydemanded (billions

of dollars)

0 50 100 150 200 250 300

10

7.5

5

2.5

0

Dm

+ =TransactionsDemand, Dt

AssetDemand, Da

Total demandfor money, Dm

0 50 100 150 200 250 300

Ra

te o

f in

tere

st,

i (

pe

rce

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

Ra

te o

f in

tere

st,

i (

pe

rce

nt)

Amount of moneydemanded (billions

of dollars)

10

7.5

5

2.5

0

Da

Ra

te o

f in

tere

st,

i (

pe

rce

nt)

Amount of moneydemanded (billions

of dollars)

0 50 100 150 200 250 300

10

7.5

5

2.5

0

Sm

EquilibriumInterest Rate

ie

Ra

te o

f in

tere

st,

i (

pe

rce

nt)

Amount of moneydemanded (billions

of dollars)

0 50 100 150 200 250 300

10

7.5

5

2.5

0

Dm

ADD THEMONEY SUPPLY

TO FIND THEEQUILIBRIUM RATE

OF INTEREST

Ra

te o

f in

tere

st,

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

Sm

THE MONEY MARKET

Suppose the moneysupply is decreasedfrom $200 billion, Sm,

to $150 billion Sm1.

Ra

te o

f in

tere

st,

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

Sm

A temporary shortageof money will requirethe sale of some assetsto meet the need.

Sm1

THE MONEY MARKET

Ra

te o

f in

tere

st,

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

Sm Sm2

THE MONEY MARKET

A temporary surplusof money will requirethe purchase of someassets to meet the de-sired level of liquidity.

Bonds are assumedas a typical asset with

lower prices associatedwith higher

interest rates

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

THE FEDERAL RESERVE AND THE BANKING SYSTEM

THE FEDERAL RESERVE AND THE BANKING SYSTEM

FederalOpen Market

Committee

Board ofGovernors

12 FederalReserve Banks

CommercialBanks

Thrift Institutions(Savings & loan associations,mutual savings banks, credit

unions)

The Public(Households and

businesses)

FED Functions & the Money Supply • 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

FED Functions & the Money Supply

Federal Reserve IndependenceRecent 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

THANK YOU