UNIVERSAL COLLEGE
OF ENGINEERING &
TECHNOLOGY
SUBJECT-
RD
EC 3 SEM
ANUPRIYA KASHYAP
130460111001
GUIDED BY
SHITAL
SHASTRI
Money and
Banking
FUNCTIONS OF MONEY
• Medium of Exchange
• Unit of Account
• Store of Value
MONEY SUPPLY
Definition…
Currency
•Token Money
•Federal Reserve Notes
•Little Intrinsic Value
Checkable Deposits
•Commercial Banks
•Thrift Institutions
MONEY SUPPLY
=
Plus...
Near-monies
Savings Deposits
• Money Market Deposit
Accounts (MMDAs)
Smaller Time Deposits
Money Market Mutual Funds
(MMMFs)
MONEY SUPPLY
=
Plus...
Large Time Deposits
Illustrated…
MONEY SUPPLY
Currency (coins & paper money)
plus Checkable deposits
M1 M2 M3
equals M1
$1236
2003 Data
(billions of dollars)
MONEY SUPPLY
M1 M2 M3
Currency (coins & paper money)
plus Checkable deposits
equals M1
plus Savings deposits,
$1236
including MMDA’s
plus Small time deposits
plus Money market mutual fund
(MMMF) balances
equals M2
$5899
2003 Data
(billions of dollars)
MONEY SUPPLY
Currency
Currency(coins
(coins&
&paper
papermoney)
money)
plus
plus Checkable
Checkabledeposits
deposits
M1 M2 M3
equals
equalsM1
M1
plus
plus Savings
Savingsdeposits,
deposits,
including
includingMMDA’s
MMDA’s
plus
plusSmall
Smalltime
timedeposits
deposits
plus
plusMoney
Moneymarket
marketmutual
mutualfund
fund
(MMMF)
(MMMF)balances
balances
$1236
equals
equalsM2
M2
plus Large time deposits
equals M3
$5899
2003 Data
(billions of dollars)
$8595
WHAT ABOUT CREDIT CARDS?
WHAT BACKS THE MONEY SUPPLY?
Money as Debt
Value 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 rate
Liquidity Preference
illustrated...
THE DEMAND FOR MONEY
Rate of interest, i (percent)
Transactions
Demand, Dt
+
10
7.5
5
2.5
Dt
0
0 50 100 150 200 250 300
Amount of money
demanded (billions
of dollars)
THE DEMAND FOR MONEY
+
10
7.5
5
2.5
Dt
Rate of interest, i (percent)
Rate of interest, i (percent)
Transactions
Demand, Dt
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)
THE DEMAND FOR MONEY
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)
+
Rate of interest, i (percent)
Rate of interest, i (percent)
Transactions
Demand, Dt
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)
THE DEMAND FOR MONEY
7.5
5
2.5
Asset
Demand, Da
=
Total demand
for money, Dm
ADD THE
MONEY SUPPLY
TO FIND THE
EQUILIBRIUM RATE
OF INTEREST
D
D
t
0
10
7.5
5
2.5
a
Rate of interest, i (percent)
10
+
Rate of interest, i (percent)
Rate of interest, i (percent)
Transactions
Demand, Dt
Sm
10
7.5
ie
5
2.5
Dm
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)
Equilibrium
Interest Rate
Rate of interest, i (percent)
THE MONEY MARKET
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)
Rate of interest, i (percent)
THE MONEY MARKET
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)
Rate of interest, i (percent)
THE MONEY MARKET
Sm Sm2
10
A temporary surplus
of money will require
Bonds are assumed
the purchase of some
7.5
as a typical asset assets
with to meet the deie sired level of liquidity.
5 lower prices associated
with higher
interest rates Dm
2.5
0
0
50
100
150
200 250 300
Amount of money demanded
(billions of dollars)
THE FEDERAL RESERVE AND
THE BANKING SYSTEM
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
Federal
Open Market
Committee
Board of
Governors
12 Federal
Reserve Banks
Commercial
Banks
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 Independence
Recent 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