FUNCTIONS OF MONEY
SUPPLY OF MONEY
DEMAND FOR MONEY
MONEY MARKET
U.S. FINANCIAL SYSTEM
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1999
CHAPTER THIRTEEN

Medium of Exchange
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•
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• Medium of Exchange
• Unit of Account
Store of Value
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1999

Money Definition
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Money Definition
Currency
• Token Money
• Intrinsic Value
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Money Definition
Currency
• Token Money
• Intrinsic Value
Federal Reserve Notes
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1999

Money Definition
Currency
• Token Money
• Intrinsic Value
Checkable Deposits
• Commercial Banks
• Thrift Institutions
• Savings & Loan Associations
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1999

Money Definition
Currency
• Token Money
• Intrinsic Value
Checkable Deposits
• Commercial Banks
• Thrift Institutions
• Savings & Loan Associations
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1999

Money Definition
Currency
• Token Money
• Intrinsic Value
Checkable Deposits
• Commercial Banks
• Thrift Institutions
• Savings & Loan Associations
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1999

Money Definition
= Plus...
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1999

Money Definition
= Plus...
Near-monies
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1999

Money Definition
= Plus...
Near-monies
Noncheckable Savings
Accounts
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1999

Money Definition
= Plus...
Near-monies
Noncheckable Savings
Accounts
Money Market Deposit
Accounts
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1999

Money Definition
= Plus...
Near-monies
Noncheckable Savings
Accounts
Money Market Deposit
Accounts
Time Deposits
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1999

Money Definition
= Plus...
Near-monies
Noncheckable Savings
Accounts
Money Market Deposit
Accounts
Time Deposits
Money Market Mutual Funds
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1999

Money Definition
=
Plus...
Specifically in 1997...
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1999

The Supply of Money
Currency (coins & paper money) plus Checkable deposits
1997 Data
(billions of dollars)
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1999

The Supply of Money
Currency (coins & paper money) plus Checkable deposits equals M1
M1
$1057
1997 Data
(billions of dollars)
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1999

The Supply of Money
Currency (coins & paper money) plus Checkable deposits
M1 equals M1
$1057 plus Noncheckable savings deposits, including MMDA’s plus Small time deposits plus Money market mutual fund balances (MMMF’s)
1997 Data
(billions of dollars)
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1999

The Supply of Money
Currency (coins & paper money) plus Checkable deposits
M1 M2 equals M1
$1057 plus Noncheckable savings deposits, including MMDA’s plus Small time deposits plus Money market mutual fund balances (MMMF’s) equals M2
$3964
1997 Data
(billions of dollars)
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1999

The Supply of Money
Currency (coins & paper money) plus Checkable deposits
M1 M2 equals M1
$1057 plus Noncheckable savings deposits, including MMDA’s plus Small time deposits plus Money market mutual fund balances (MMMF’s) equals M2
$3964 plus Large time deposits
1997 Data
(billions of dollars)
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1999

The Supply of Money
Currency (coins & paper money) plus Checkable deposits
M1 M2 M3 equals M1
$1057 plus Noncheckable savings deposits, including MMDA’s plus Small time deposits plus Money market mutual fund balances (MMMF’s) equals M2
$3964 plus Large time deposits equals M3
1997 Data
(billions of dollars) $5205
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1999

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1999

What Backs the Money Supply?
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1999

What Backs the Money Supply?
•
Money as Debt
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What Backs the Money Supply?
•
Money as Debt
•
Value of Money
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1999

What Backs the Money Supply?
•
Money as Debt
•
Value of Money
•
Acceptability
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1999

What Backs the Money Supply?
•
Money as Debt
•
Value of Money
•
Acceptability
•
Legal Tender
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1999

What Backs the Money Supply?
•
Money as Debt
•
Value of Money
•
Acceptability
•
Legal Tender
•
Fiat Money
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1999

What Backs the Money Supply?
•
Money as Debt
•
Value of Money
•
Acceptability
•
Legal Tender
•
Relative Scarcity
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1999

What Backs the Money Supply?
•
Money as Debt
•
Value of Money
•
Acceptability
•
Legal Tender
•
Relative Scarcity
•
Money and Prices
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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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1999

What Backs the Money Supply?
•
Money as Debt
• NOTES:
•
•
Acceptability
• between the price level
Legal Tender
• dollar.
Relative Scarcity
=
•
Value of the Dollar
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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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1999

Maintaining Money’s Value
What backs the money supply?
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1999

Maintaining Money’s Value
What backs the money supply?
Stable Value!
through....
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1999

Maintaining Money’s Value
What backs the money supply?
Stable Value!
through....
•
Appropriate fiscal policy
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1999

Maintaining Money’s Value
What backs the money supply?
Stable Value!
through....
•
Appropriate fiscal policy
•
Intelligent management of the money supply
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1999

The Demand For Money
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1999

The Demand For Money
Transactions Demand, D
1 varies directly with nominal GDP
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1999

The Demand For Money
Transactions Demand, D
1 varies directly with nominal GDP
Asset Demand, D
2 varies inversely with the interest rate
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1999

The Demand For Money
Transactions
Demand, D t
+
10
7.5
5
2.5
D t
0
0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
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1999

The Demand For Money
Transactions
Demand, D t
+ Asset
Demand, D a
=
10
7.5
10
7.5
5 5
2.5
D t
0
0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
2.5
D a
0
0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
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1999

The Demand For Money
Transactions
Demand, D t
+ Asset
Demand, D a
= Total demand for money, D m
10
7.5
10
7.5
10
7.5
5 5 5
2.5
D t
0
0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
2.5
D a
0
0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
2.5
D m
0
0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
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1999

10
7.5
The Demand For Money
Transactions
Demand, D t
+ Asset
Demand, D a
=
10
ADD THE
7.5
MONEY SUPPLY
10
7.5
5
Total demand for money, D m
5
2.5
0
D t
EQUILIBRIUM RATE
D a OF INTEREST
0
0 50 100 150 200 250 300 0 50 100 150 200 250 300
D m
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)
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1999

The Demand For Money
Transactions
Demand, D t
+ Asset
Demand, D a
= Total demand for money, D m
10
7.5
10
7.5
10
7.5
S m
5 5 5 i e
2.5
D t
0
0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
2.5
D a
0
0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
2.5
D m
0
0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
Equilibrium
Interest Rate
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The Money Market
10
7.5
S m
Suppose the money supply is decreased i e from $200 billion, S m, to $150 billion S m1
.
5
2.5
D m
0
0 50 100 150 200 250 300
Amount of money demanded
(billions of dollars)
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1999

The Money Market
S m1
10
7.5
S m
A temporary shortage of money will require the sale of some assets i e to meet the need.
5
2.5
D m
0
0 50 100 150 200 250 300
Amount of money demanded
(billions of dollars)
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1999

The Money Market
S m1
S m
A temporary shortage
10 of money will require
Bonds are assumed the sale of some assets lower prices associated
5 with higher i e to meet the need.
2.5
interest rates D m
0
0 50 100 150 200 250 300
Amount of money demanded
(billions of dollars)
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1999

The Money Market
S m1
10
7.5
After adjustments to asset holdings, a new equilibrium will be seen at a higher level of interest.
5 i e
2.5
D m
0
0 50 100 150 200 250 300
Amount of money demanded
(billions of dollars)
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1999

The Money Market
S m
10
7.5
Suppose the money supply is increased from $200 billion, S m, to $250 billion S m2
.
i e
5
2.5
D m
0
0 50 100 150 200 250 300
Amount of money demanded
(billions of dollars)
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1999

The Money Market
10
7.5
i
S m
S m2
A temporary surplus of money will require the purchase of some assets to meet the desired level of liquidity.
e
5
2.5
D m
0
0 50 100 150 200 250 300
Amount of money demanded
(billions of dollars)
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1999

The Money Market
10
7.5
S m2
After adjustments to asset holdings, a new equilibrium will be seen at a lower level of interest.
5
2.5
i e D m
0
0 50 100 150 200 250 300
Amount of money demanded
(billions of dollars)
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1999

The United States Financial System
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1999

The United States Financial System
The Federal Reserve System
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1999

The United States Financial System
The Federal Reserve System
• Board of Governors
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1999

The United States Financial System
The Federal Reserve System
• Board of Governors
• Assistance & Advice
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1999

The United States Financial System
The Federal Reserve System
• Board of Governors
• Assistance & Advice
• Federal Open Market Committee
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1999

The United States Financial System
The Federal Reserve System
• Board of Governors
• Assistance & Advice
• Federal Open Market Committee
•
Three Advisory Councils
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1999

The United States Financial System
The Federal Reserve System
• Board of Governors
• Assistance & Advice
• Federal Open Market Committee
•
Three Advisory Councils
• The Twelve Federal Reserve Banks
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1999

The United States Financial System
The Federal Reserve System
• Board of Governors
• Assistance & Advice
• Federal Open Market Committee
•
Three Advisory Councils
• The Twelve Federal Reserve Banks
• Central Bank Role
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1999

The United States Financial System
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
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1999

The United States Financial System
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
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1999

The United States Financial System
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
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1999

FED Functions and the Money Supply
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1999

FED Functions and the Money Supply
•
Issuing Currency
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1999

FED Functions and the Money Supply
•
Issuing Currency
•
Setting Reserve Requirements &
Holds Reserves
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1999

FED Functions and the Money Supply
•
Issuing Currency
•
Setting Reserve Requirements &
Holds Reserves
•
Lending Money to Banks & Thrifts
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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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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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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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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 Supply
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1999

FED Functions and the Money Supply
•
Issuing Currency
• NOTES:
•
Lending Money to Banks & Thrifts
•
Federal Government
Check Collection
• Fiscal Agents for the Federal
Government
•
Supervision of Member Banks
•
Control of the Money Supply
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1999

Recent Developments
•
Relative Decline of Banks & Thrifts
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1999

Recent Developments
•
Relative Decline of Banks & Thrifts
•
Expansion of Services
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1999

Recent Developments
•
Relative Decline of Banks & Thrifts
•
Expansion of Services
•
Mergers
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1999

Recent Developments
•
Relative Decline of Banks & Thrifts
•
Expansion of Services
•
Mergers
•
Regulatory Reform
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1999

Recent Developments
•
Relative Decline of Banks & Thrifts
•
Expansion of Services
•
Mergers
•
Regulatory Reform
•
Market Globalization
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1999

Recent Developments
•
Relative Decline of Banks & Thrifts
•
Expansion of Services
•
Mergers
•
Regulatory Reform
•
Market Globalization
•
Electronic Money
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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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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1999

Recent Developments
•
Relative Decline of Banks & Thrifts
•
•
Mergers
•
•
•
Electronic Money
• E-Cash
•
Smart Cards
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1999

 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
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1999















 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

Coming up next...
Chapter 14
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1999