3
3.1
3.2
3.3
Slide 1
MONEY AND
INTEREST
The Money Supply
Money Creation and Circulation
Interest and Interest Rates
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Lesson 3.1
THE MONEY SUPPLY
GOALS
Define money supply, and explain how it
is measured
Describe two types of money, and explain
the fractional-reserve system
Slide 2
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WHAT IS THE MONEY SUPPLY?
The money supply is defined as the liquid assets
held by banks and individuals.
The flow of money—and the amount of it
flowing—has a direct effect on how the economy
performs.
Slide 3
Copyright South-Western, a division of Thomson, Inc.
EXPANDING THE MONEY SUPPLY
Extra money in the economy can cause inflation
Demand for goods and services increase
Supply decreases, causing prices to rise
Slide 4
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MEASURING THE MONEY
Liquidity is a measure of how quickly things may
be converted to something of value like cash.
Liquidity is variable, depending on the nature of
the asset or liability.
More Liquid
Change in your pocket
Slide 5
Less Liquid
Your savings account
A certificate of deposit
that matures next June
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AGGREGATE MEASURES OF THE MONEY SUPPLY
M1
M2
M3
MZM
Slide 6
Money that can be spent immediately
All the money in M1 plus short-term
investments
All the money in M1 and M2 plus large
deposits
Money at zero maturity
Copyright South-Western, a division of Thomson, Inc.
THE NATURE OF MONEY
Two types of money
Commodity money is based on some item of value,
for example, gold or precious stones.
Fiat money is money that is deemed legal tender by
the government, and it is not based on or convertible
into a commodity.
The fractional-reserve system
Slide 7
Copyright South-Western, a division of Thomson, Inc.
Lesson 3.2
MONEY CREATION
AND CIRCULATION
GOALS
Describe how money is created by bank
activities
Explain how money circulates in the
United States
Slide 8
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HOW MONEY IS CREATED
Printing currency and creating money are two
different things.
Money is actually created by the interaction of
the demand for it, banks’ use of it, and the
Federal Reserve’s supply and control of it.
Slide 9
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DEPOSITS AND RESERVES
Primary reserves
Secondary reserves
Slide 10
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THE MULTIPLIER EFFECT
Money on deposit, minus the reserve
requirement, can be loaned to customers.
When it is, it creates new deposits, which also
go out to customers as loans and create more
deposits, thus expanding the amount of money
in the system.
Slide 11
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HOW MONEY CIRCULATES
Transfers and circulation
The Fed and fiat money
Money as an IOU
Slide 12
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Lesson 3.3
INTEREST AND
INTEREST RATES
GOALS
List factors that affect interest rates
Explain which factors the Federal Reserve
affects
Slide 13
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INTEREST RATES AND BUSINESS
The money supply and the economy are linked
closely to interest rates.
Generally, when rates are high, money is said to
be “tight” and business tends to slow because it
costs more to acquire capital.
When rates drop, more credit is accessible, and
the economy tends to gather speed.
Slide 14
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FACTORS AFFECTING INTEREST RATES
The federal funds rate is the amount of interest
charged for short-term, interbank loans.
The discount rate is the interest rate that the
Federal Reserve sets and charges for loans to
member banks.
The prime rate is the rate that banks charge their
best and most reliable customers.
Slide 15
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MONETARY POLICY AND INTEREST RATES
The Federal Reserve sets the discount rate.
The Federal Reserve only influences the federal
funds rate.
Slide 16
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