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
![Page 1: Copyright McGraw-Hill, Inc. 1999 Money & Banking FUNCTIONS OF MONEY SUPPLY OF MONEY DEMAND FOR MONEY MONEY MARKET U.S. FINANCIAL SYSTEM CHAPTER THIRTEEN](https://reader035.vdocuments.net/reader035/viewer/2022062413/5a4d1b3e7f8b9ab05999ffb6/html5/thumbnails/1.jpg)
Copyright McGraw-Hill, Inc. 1999
Money & Banking
FUNCTIONS OF MONEYSUPPLY OF MONEY
DEMAND FOR MONEYMONEY MARKET
U.S. FINANCIAL SYSTEM
CHAPTER THIRTEEN
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Copyright McGraw-Hill, Inc. 1999
Functions of Money• Medium of Exchange
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Copyright McGraw-Hill, Inc. 1999
Functions of Money• Medium of Exchange
• Unit of Account
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Copyright McGraw-Hill, Inc. 1999
Functions of Money• Medium of Exchange
• Unit of Account
• Store of Value
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Copyright McGraw-Hill, Inc. 1999
Money Definition
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Copyright McGraw-Hill, Inc. 1999
Money Definition
Currency•Token Money•Intrinsic Value
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Copyright McGraw-Hill, Inc. 1999
Money Definition
Currency•Token Money•Intrinsic Value
Federal Reserve Notes
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Copyright McGraw-Hill, Inc. 1999
Money Definition
Currency•Token Money•Intrinsic Value
Checkable Deposits•Commercial Banks•Thrift Institutions•Savings & Loan Associations
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Copyright McGraw-Hill, Inc. 1999
Money Definition
Currency•Token Money•Intrinsic Value
Checkable Deposits•Commercial Banks•Thrift Institutions•Savings & Loan Associations
Mutual Savings Banks
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Copyright McGraw-Hill, Inc. 1999
Money Definition
Currency•Token Money•Intrinsic Value
Checkable Deposits•Commercial Banks•Thrift Institutions•Savings & Loan Associations
Mutual Savings BanksCredit Unions
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Copyright McGraw-Hill, Inc. 1999
Money Definition= Plus...
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Copyright McGraw-Hill, Inc. 1999
Money Definition
Near-monies= Plus...
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Copyright McGraw-Hill, Inc. 1999
Money Definition
Near-moniesNoncheckable Savings
Accounts
= Plus...
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Copyright McGraw-Hill, Inc. 1999
Money Definition
Near-moniesNoncheckable Savings
AccountsMoney Market Deposit
Accounts
= Plus...
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Copyright McGraw-Hill, Inc. 1999
Money Definition
Near-moniesNoncheckable Savings
AccountsMoney Market Deposit
AccountsTime Deposits
= Plus...
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Copyright McGraw-Hill, Inc. 1999
Money Definition
Near-moniesNoncheckable Savings
AccountsMoney Market Deposit
AccountsTime DepositsMoney Market Mutual Funds
= Plus...
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Copyright McGraw-Hill, Inc. 1999
Money Definition
Large Time Deposits
= Plus...
Specifically in 1997...
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Copyright McGraw-Hill, Inc. 1999
The Supply of MoneyCurrency (coins & paper money) plus Checkable deposits
1997 Data(billions of dollars)
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Copyright McGraw-Hill, Inc. 1999
The Supply of MoneyCurrency (coins & paper money) plus Checkable depositsequals M1M1
M1$1057
1997 Data(billions of dollars)
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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)
M1$1057
1997 Data(billions of dollars)
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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
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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
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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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Copyright McGraw-Hill, Inc. 1999
What about credit cards?What about credit cards?
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Copyright McGraw-Hill, Inc. 1999
What Backs the Money Supply?
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Copyright McGraw-Hill, Inc. 1999
What Backs the Money Supply?• Money as Debt
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Copyright McGraw-Hill, Inc. 1999
What Backs the Money Supply?• Money as Debt• Value of Money
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Copyright McGraw-Hill, Inc. 1999
What Backs the Money Supply?• Money as Debt• Value of Money
• Acceptability
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Copyright McGraw-Hill, Inc. 1999
What Backs the Money Supply?• Money as Debt• Value of Money
• Acceptability• Legal Tender
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Copyright McGraw-Hill, Inc. 1999
What Backs the Money Supply?• Money as Debt• Value of Money
• Acceptability• Legal Tender
•Fiat Money
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Copyright McGraw-Hill, Inc. 1999
What Backs the Money Supply?• Money as Debt• Value of Money
• Acceptability• Legal Tender• Relative Scarcity
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Copyright McGraw-Hill, Inc. 1999
What Backs the Money Supply?• Money as Debt• Value of Money
• Acceptability• Legal Tender• Relative Scarcity
• Money and Prices
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Copyright McGraw-Hill, Inc. 1999
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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Copyright McGraw-Hill, Inc. 1999
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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Copyright McGraw-Hill, Inc. 1999
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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Copyright McGraw-Hill, Inc. 1999
Maintaining Money’s ValueWhat backs the money supply?
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Copyright McGraw-Hill, Inc. 1999
Maintaining Money’s ValueWhat backs the money supply?
Stable Value!through....
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Copyright McGraw-Hill, Inc. 1999
Maintaining Money’s ValueWhat backs the money supply?
Stable Value!through....
• Appropriate fiscal policy
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Copyright McGraw-Hill, Inc. 1999
Maintaining Money’s ValueWhat backs the money supply?
Stable Value!through....
• Appropriate fiscal policy• Intelligent management of the money supply
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Copyright McGraw-Hill, Inc. 1999
The Demand For Money
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Copyright McGraw-Hill, Inc. 1999
The Demand For MoneyTransactions Demand, D1
varies directly with nominal GDP
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Copyright McGraw-Hill, Inc. 1999
The Demand For MoneyTransactions Demand, D1
varies directly with nominal GDP
Asset Demand, D2
varies inversely with the interest rateillustrated....
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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
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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
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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
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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
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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
Copyright McGraw-Hill, Inc. 1999
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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
![Page 49: Copyright McGraw-Hill, Inc. 1999 Money & Banking FUNCTIONS OF MONEY SUPPLY OF MONEY DEMAND FOR MONEY MONEY MARKET U.S. FINANCIAL SYSTEM CHAPTER THIRTEEN](https://reader035.vdocuments.net/reader035/viewer/2022062413/5a4d1b3e7f8b9ab05999ffb6/html5/thumbnails/49.jpg)
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
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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
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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
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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
![Page 53: Copyright McGraw-Hill, Inc. 1999 Money & Banking FUNCTIONS OF MONEY SUPPLY OF MONEY DEMAND FOR MONEY MONEY MARKET U.S. FINANCIAL SYSTEM CHAPTER THIRTEEN](https://reader035.vdocuments.net/reader035/viewer/2022062413/5a4d1b3e7f8b9ab05999ffb6/html5/thumbnails/53.jpg)
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
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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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Copyright McGraw-Hill, Inc. 1999
The United States Financial System
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The Federal Reserve SystemThe United States Financial System
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Copyright McGraw-Hill, Inc. 1999
The Federal Reserve System• Board of Governors
The United States Financial System
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Copyright McGraw-Hill, Inc. 1999
The Federal Reserve System• Board of Governors• Assistance & Advice
The United States Financial System
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Copyright McGraw-Hill, Inc. 1999
The Federal Reserve System• Board of Governors• Assistance & Advice
• Federal Open Market Committee
The United States Financial System
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Copyright McGraw-Hill, Inc. 1999
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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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
The United States Financial System
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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
The United States Financial System
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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
The United States Financial System
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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
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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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Copyright McGraw-Hill, Inc. 1999
FED Functions and the Money Supply
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Copyright McGraw-Hill, Inc. 1999
FED Functions and the Money Supply • Issuing Currency
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Copyright McGraw-Hill, Inc. 1999
FED Functions and the Money Supply • Issuing Currency• Setting Reserve Requirements &
Holds Reserves
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Copyright McGraw-Hill, Inc. 1999
FED Functions and the Money Supply • Issuing Currency• Setting Reserve Requirements &
Holds Reserves• Lending Money to Banks & Thrifts
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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
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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
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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
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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
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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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Copyright McGraw-Hill, Inc. 1999
Recent Developments• Relative Decline of Banks & Thrifts• Expansion of Services• Mergers• Regulatory Reform
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Copyright McGraw-Hill, Inc. 1999
Recent Developments• Relative Decline of Banks & Thrifts• Expansion of Services• Mergers• Regulatory Reform• Market Globalization
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Copyright McGraw-Hill, Inc. 1999
Recent Developments• Relative Decline of Banks & Thrifts• Expansion of Services• Mergers• Regulatory Reform• Market Globalization• Electronic Money
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Copyright McGraw-Hill, Inc. 1999
Recent Developments• Relative Decline of Banks & Thrifts• Expansion of Services• Mergers• Regulatory Reform• Market Globalization• Electronic Money
• E-Cash
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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
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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
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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
Copyright McGraw-Hill, Inc. 1999
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Copyright McGraw-Hill, Inc. 1999
How Banks Create MoneyHow Banks Create Money
Chapter 14
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