Functions of Money
What Backs the
Money Supply
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
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End
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13
C HAPTE R
Money and
Banking
Next
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Copyright McGraw-Hill/Irwin, 2002
FUNCTIONS OF MONEY
Functions of Money
What Backs the
Money Supply
Demand for Money
• Medium of Exchange
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
• Unit of Account
Key Terms
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• Store of Value
Copyright McGraw-Hill/Irwin, 2002
MONEY SUPPLY
Functions of Money
What Backs the
Money Supply
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Definition…
Currency
•Token Money
•Federal Reserve Notes
•Intrinsic Value
Key Terms
Checkable Deposits
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End
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•Commercial Banks
•Thrift Institutions
Copyright McGraw-Hill/Irwin, 2002
MONEY SUPPLY
Functions of Money
What Backs the
Money Supply
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
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End
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=
Plus...
Near-monies
Savings Deposits
• Money Market Deposit
Accounts (MMDAs)
Smaller Time Deposits
Money Market Mutual Funds
(MMMFs)
Copyright McGraw-Hill/Irwin, 2002
MONEY SUPPLY
Functions of Money
What Backs the
Money Supply
Plus...
=
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
Large Time Deposits
FED Functions &
the Money Supply
Key Terms
Previous
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End
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Illustrated…
Next
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Copyright McGraw-Hill/Irwin, 2002
MONEY SUPPLY
Functions of Money
What Backs the
Money Supply
Demand for Money
Currency (coins & paper money)
plus Checkable deposits
M1 M2 M3
equals M1
The Money Market
$1101
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
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End
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2000 Data
(billions of dollars)
Copyright McGraw-Hill/Irwin, 2002
MONEY SUPPLY
Functions of Money
What Backs the
Money Supply
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
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End
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Currency (coins & paper money)
plus Checkable deposits
M1 M2 M3
equals M1
plus Savings deposits,
including MMDA’s
plus Small time deposits
plus Money market mutual
fund
(MMMF) balances
equals M2
$1101
$4827
2000 Data
(billions of dollars)
Copyright McGraw-Hill/Irwin, 2002
MONEY SUPPLY
Functions of Money
What Backs the
Money Supply
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
Previous
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End
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Next
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Currency (coins & paper money)
plus Checkable deposits
M1 M2 M3
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
Copyright McGraw-Hill/Irwin, 2002
$1101
$4827
2000 Data
(billions of dollars)
$6853
WHAT ABOUT CREDIT CARDS?
Functions of Money
What Backs the
Money Supply
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
Previous
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End
Show
13 - 9
Next
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Copyright McGraw-Hill/Irwin, 2002
WHAT BACKS THE MONEY SUPPLY?
Functions of Money
What Backs the
Money Supply
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
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End
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Money as Debt
Value of Money
• Acceptability
• Legal Tender
• Relative Scarcity
Money and Prices
• Value of the Dollar
• D = 1/Price Level
Inflation and Acceptability
Copyright McGraw-Hill/Irwin, 2002
WHAT BACKS THE MONEY SUPPLY?
Functions of Money
What Backs the
Money Supply
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
Previous
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End
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13 - 11
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So, What Backs the
Money Supply?
Stable Value!
through...
• Appropriate Fiscal Policy
• Intelligent Management
of the Money Supply
Copyright McGraw-Hill/Irwin, 2002
THE DEMAND FOR MONEY
Functions of Money
What Backs the
Money Supply
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
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End
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Transactions Demand, Dt
varies directly with nominal
GDP
Asset Demand, Da
varies inversely with the
interest rate
illustrated...
Copyright McGraw-Hill/Irwin, 2002
THE DEMAND FOR MONEY
Transactions
Demand, Dt
Functions of Money
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Rate of interest, i (percent)
What Backs the
Money Supply
+
10
7.5
5
2.5
Dt
0
0 50 100 150 200 250 300
Key Terms
Amount of money
demanded (billions
of dollars)
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End
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13 - 13
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Copyright McGraw-Hill/Irwin, 2002
THE DEMAND FOR MONEY
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
Previous
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End
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13 - 14
Rate of interest, i (percent)
What Backs the
Money Supply
+
10
7.5
5
2.5
Dt
Rate of interest, i (percent)
Transactions
Demand, Dt
Functions of Money
Asset
Demand, Da
=
10
7.5
5
2.5
Da
0
0 50 100 150 200 250 300
0
0 50 100 150 200 250 300
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Next
Slide
Copyright McGraw-Hill/Irwin, 2002
THE DEMAND FOR MONEY
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
Previous
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End
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+
10
7.5
5
2.5
Dt
Asset
Demand, Da
=
10
7.5
5
2.5
Da
Total demand
for money, Dm
Rate of interest, i (percent)
Demand for Money
Rate of interest, i (percent)
What Backs the
Money Supply
Rate of interest, i (percent)
Transactions
Demand, Dt
Functions of Money
10
7.5
5
2.5
Dm
0
0 50 100 150 200 250 300
0
0 50 100 150 200 250 300
0
0 50 100 150 200 250 300
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Next
Slide
Copyright McGraw-Hill/Irwin, 2002
THE DEMAND FOR MONEY
Transactions
Demand, Dt
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
Previous
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End
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10
7.5
5
2.5
Dt
+
Asset
Demand, Da
=
Total demand
for money, Dm
ADD THE
MONEY SUPPLY
TO FIND THE
EQUILIBRIUM RATE
OF INTEREST
10
7.5
5
2.5
Da
Rate of interest, i (percent)
Demand for Money
Rate of interest, i (percent)
What Backs the
Money Supply
Rate of interest, i (percent)
Functions of Money
10
Sm
7.5
5
2.5
ie
Dm
0
0 50 100 150 200 250 300
0
0 50 100 150 200 250 300
0
0 50 100 150 200 250 300
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Amount of money
demanded (billions
of dollars)
Next
Slide
Equilibrium
Interest Rate
Copyright McGraw-Hill/Irwin, 2002
THE MONEY MARKET
What Backs the
Money Supply
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
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End
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Rate of interest, i (percent)
Functions of Money
Sm
10
7.5
ie
5
Dm
2.5
0
Suppose the money
supply is decreased
from $200 billion, Sm,
to $150 billion Sm1.
0
50
100
150
200 250 300
Amount of money demanded
(billions of dollars)
Copyright McGraw-Hill/Irwin, 2002
THE MONEY MARKET
What Backs the
Money Supply
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
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End
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13 - 18
Next
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Rate of interest, i (percent)
Functions of Money
Sm1
Sm
10
7.5
ie
5
Dm
2.5
0
A temporary shortage
of money will require
the sale of some assets
to meet the need.
0
50
100
150
200 250 300
Amount of money demanded
(billions of dollars)
Copyright McGraw-Hill/Irwin, 2002
THE MONEY MARKET
What Backs the
Money Supply
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
Previous
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End
Show
13 - 19
Next
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Rate of interest, i (percent)
Functions of Money
Sm
10
7.5
ie
5
Dm
2.5
0
Suppose the money
supply is increased
from $200 billion, Sm,
to $250 billion Sm2.
0
50
100
150
200 250 300
Amount of money demanded
(billions of dollars)
Copyright McGraw-Hill/Irwin, 2002
THE MONEY MARKET
What Backs the
Money Supply
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
Previous
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End
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13 - 20
Next
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Rate of interest, i (percent)
Functions of Money
Sm Sm2
10
7.5
ie
5
Dm
2.5
0
A temporary surplus
of money will require
the purchase of some
assets to meet the desired level of liquidity.
0
50
100
150
200 250 300
Amount of money demanded
(billions of dollars)
Copyright McGraw-Hill/Irwin, 2002
THE MONEY MARKET
What Backs the
Money Supply
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
Previous
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End
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13 - 21
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Rate of interest, i (percent)
Functions of Money
Sm Sm2
10
A temporary surplus
of money will require
Bonds are assumed
thewith
purchase of some
as a typical asset
assets to meet the delower prices associated
ie sired level of liquidity.
with higher
7.5
5
interest rates
Dm
2.5
0
0
50
100
150
200 250 300
Amount of money demanded
(billions of dollars)
Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the
Money Supply
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
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End
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THE FEDERAL RESERVE AND
THE BANKING SYSTEM
Centralization and Public Control
• Board of Governors
• Assistance & Advice
• Federal Open Market Committee
• Three Advisory Councils
• The 12 Federal Reserve Banks
• Central Bank Role
• Quasi-Public Banks
• Banker’s Banks
• Commercial Banks & Thrifts
Copyright McGraw-Hill/Irwin, 2002
THE FEDERAL RESERVE AND
THE BANKING SYSTEM
Functions of Money
What Backs the
Money Supply
Open Market
Committee
Board of
Governors
Advisory
Councils
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
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12 Federal
Reserve Banks
Commercial
Banks
Next
Slide
Thrift Institutions
(Savings & loan associations,
mutual savings banks, credit unions)
The Public
(Households and
businesses)
Copyright McGraw-Hill/Irwin, 2002
FED Functions & the Money Supply
Functions of Money
What Backs the
Money Supply
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
Previous
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End
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• Issuing Currency
• Setting Reserve Requirements
& Holding Reserves
• Lending Money to Banks &
Thrifts
• Providing for Check Collection
• Acting as Fiscal Agent
• Supervising Banks
• Controlling the Money Supply
Copyright McGraw-Hill/Irwin, 2002
FED Functions & the Money Supply
Functions of Money
What Backs the
Money Supply
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
Previous
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End
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Next
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Federal Reserve Independence
Recent Developments
•Relative Decline of Banks and
Thrifts
•Financial Services Industry
•Consolidation Among Banks and
Thrifts
•Globalization of Financial
Markets
•Electronic Transactions
Copyright McGraw-Hill/Irwin, 2002
FED Functions & the Money Supply
Functions of Money
What Backs the
Money Supply
Demand for Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
Previous
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End
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13 - 26
Next
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Federal Reserve Independence
Recent Developments
•Relative Decline of Banks and
Thrifts
•Financial Services Industry
•Consolidation Among Banks and
Thrifts
•Globalization of Financial
Markets
•Electronic Transactions
Chapter
Conclusions
Copyright McGraw-Hill/Irwin, 2002
medium of exchange
unit of account
store of value
M1, M2, M3
token money
Federal Reserve Notes
checkable deposits
commercial banks
thrift institutions
near-monies
savings account
money market deposit
account (MMDA)
time deposits
Copyright McGraw-Hill/Irwin 2002
money market mutual fund
(MMMF)
legal tender
transactions demand
asset demand
total demand for money
money market
Federal Reserve System
Board of Governors
Federal Open Market
Committee (FOMC)
Federal Reserve Banks
financial services industry
electronic transactions
BACK
END
Coming up next...
Functions of Money
What Backs the
Money Supply
Demand for Money
How Banks and
Thrifts Create Money
The Money Market
The Federal
Reserve & the
Banking System
FED Functions &
the Money Supply
Key Terms
Previous
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End
Show
13 - 28
Next
Slide
Chapter 14
Copyright McGraw-Hill/Irwin, 2002