CHAPTER 25 The Money Supply and the Federal Reserve System © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 1 of An Overview of MoneyWhat Is Money?Commodity and Fiat MoniesMeasuring the Supply of Money in the United States The Private Banking SystemHow Banks Create MoneyA Historical Perspective: GoldsmithsThe Modern Banking SystemThe Creation of MoneyThe Money MultiplierThe Federal Reserve SystemFunctions of the Federal ReserveThe Federal Reserve Balance SheetHow the Federal Reserve Controls theMoney SupplyThe Required Reserve RatioThe Discount RateOpen Market OperationsThe Supply Curve for MoneyLooking Ahead CHAPTER OUTLINE The Money Supply and the Federal Reserve System 25 PART V THE CORE OF MACROECONOMIC THEORY

CHAPTER 25 The Money Supply and the Federal Reserve System © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 2 Terms and Concepts: barter: takas, trampa commodity monies: mal para currency debasement: paranın değerini düşürme discount rate: reeskont oranı, merkez bankasının tasarruf bankalarına açtığı kredilere uyguladığı ıskonto oranı excess reserves: rezerv fazlaları Federal Open Market Committee (FOMC): Federal Açık Piyasa Komitesi Federal Reserve System (the Fed): Federal Rezerv Sitem (Amerikan Merkez Bankası) fiat, or token, money: yasal veya itibari para financial intermediaries: mali aracı legal tender: yasal ödeme-mübadele aracı lender of last resort: son ödünç verme (kredi) mercii (başvurulacak yer) liquidity property of money: paranın akışkanlık (likidite) özelliği M1, or transactions money: M1, işlemlerde kullanılan para M2, or broad money: M2, geniş anlamda para (para ve benzerleri) medium of exchange, or means of payment: değişim-mübadele aracı veya ödeme aracı

CHAPTER 25 The Money Supply and the Federal Reserve System © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 3 Terms and Concepts: money multiplier: para çarpanı moral suasion: istek veya telkinler near monies:para benzerleri (para olmadığı halde, para yerine geçen aktif değerler) Open Market Desk: Açık Piyasa Masası open market operations: açık piyasa işlemleri required reserve ratio: zorunlu (munzam) karşılık oranı reserves: rezervler (mevduat kuruluşlarının toplam mevduatlarından kredi vermeyip kasalarında veya merkez bankasında tuttukları pay) run on a bank: bankaya akın etmek, mevduatın çekilmesi store of value: değer biriktirme (tasarruf) aracı unit of account: hesap birimi M1 ≡ currency held outside banks + demand deposits + traveler’s checks + other checkable deposits M2 ≡ M1+savings accounts + money market accounts + other near monies Assets ≡ liabilities + capital (or net worth) Excess reserves ≡ actual reserves − required reserves Money multiplier ≡

CHAPTER 25 The Money Supply and the Federal Reserve System © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 4 of 45 An Overview of Money Money is anything that is generally accepted as a medium of exchange. Money is not income, and money is not wealth. Money is: a means of payment, a store of value, and a unit of account. What Is Money? barter The direct exchange of goods and services for other goods and services. A barter system requires a double coincidence of wants for trade to take place. Money eliminates this problem. A Means of Payment, or Medium of Exchange medium of exchange, or means of payment What sellers generally accept and buyers generally use to pay for goods and services.

CHAPTER 25 The Money Supply and the Federal Reserve System © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 5 of 45 Which field of economic theory does not require that we know anything about money? a.Microeconomics. b.Macroeconomics. c.Neither microeconomic nor macroeconomic theory requires that we know anything about money. d.None of the above. Both microeconomic and macroeconomic theory require that we know quite a bit about money.

CHAPTER 25 The Money Supply and the Federal Reserve System © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 6 of 45 Which field of economic theory does not require that we know anything about money? a.Microeconomics. b.Macroeconomics. c.Neither microeconomic nor macroeconomic theory requires that we know anything about money. d.None of the above. Both microeconomic and macroeconomic theory require that we know quite a bit about money.

CHAPTER 25 The Money Supply and the Federal Reserve System © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 7 of 45 An Overview of Money What Is Money? store of value An asset that can be used to transport purchasing power from one time period to another. A Store of Value Money is easily portable, and easily exchanged for goods at all times. liquidity property of money The property of money that makes it a good medium of exchange as well as a store of value: It is portable and readily accepted and thus easily exchanged for goods. unit of account A standard unit that provides a consistent way of quoting prices. A Unit of Account

CHAPTER 25 The Money Supply and the Federal Reserve System © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 8 of 45 Which of the following refers to the liquidity property of money? a.The fact that money makes a good medium of exchange. b.The fact that money is portable and comes in convenient denominations. c.The fact that money is readily accepted and thus easily exchanged for goods. d.All of the above.

CHAPTER 25 The Money Supply and the Federal Reserve System © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 9 of 45 Which of the following refers to the liquidity property of money? a.The fact that money makes a good medium of exchange. b.The fact that money is portable and comes in convenient denominations. c.The fact that money is readily accepted and thus easily exchanged for goods. d.All of the above.

CHAPTER 25 The Money Supply and the Federal Reserve System © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 10 of 45 An Overview of Money Commodity and Fiat Monies Dolphin Teethas Currency Shrinking Dollar Meets Its Match In Dolphin Teeth Wall Street Journal

CHAPTER 25 The Money Supply and the Federal Reserve System © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 11 of 45 An Overview of Money Commodity and Fiat Monies commodity monies Items used as money that also have intrinsic value in some other use. fiat, or token, money Items designated as money that are intrinsically worthless. legal tender Money that a government has required to be accepted in settlement of debts. currency debasement The decrease in the value of money that occurs when its supply is increased rapidly.

CHAPTER 25 The Money Supply and the Federal Reserve System © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 12 of 45 An Overview of Money Measuring the Supply of Money in the United States M1, or transactions money Money that can be directly used for transactions. M1: Transactions Money M1 ≡ currency held outside banks + demand deposits + traveler’s checks + other checkable deposits M1 is a stock measure—it is measured at a point in time—on a specific day.

CHAPTER 25 The Money Supply and the Federal Reserve System © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 13 of 45 An Overview of Money Measuring the Supply of Money in the United States near monies Close substitutes for transactions money, such as savings accounts and money market accounts. M2: Broad Money M2, or broad money M1 plus savings accounts, money market accounts, and other near monies. M2 ≡ M1 + Savings accounts + Money market accounts + Other near monies The main advantage of looking at M2 instead of M1 is that M2 is sometimes more stable.

CHAPTER 25 The Money Supply and the Federal Reserve System © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 14 of 45 When you transfer $1,000 from your checking account to your savings account, this transaction will: a.Decrease both M1 and M2. b.Decrease M1 and increase M2. c.M1 will remain the same and M2 will increase. d.M2 will remain the same and M1 will decrease.

CHAPTER 25 The Money Supply and the Federal Reserve System © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 15 of 45 When you transfer $1,000 from your checking account to your savings account, this transaction will: a.Decrease both M1 and M2. b.Decrease M1 and increase M2. c.M1 will remain the same and M2 will increase. d.M2 will remain the same and M1 will decrease.

CHAPTER 25 The Money Supply and the Federal Reserve System © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 16 of 45 An Overview of Money Measuring the Supply of Money in the United States There are no rules for deciding what is money and what is not. This poses problems for economists and those in charge of economic policy. Beyond M2

CHAPTER 25 The Money Supply and the Federal Reserve System © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 17 of 45 An Overview of Money The Private Banking System financial intermediaries Banks and other institutions that act as a link between those who have money to lend and those who want to borrow money. A Historical Perspective: Goldsmiths Goldsmiths functioned as warehouses where people stored gold for safekeeping. Upon receiving the gold, a goldsmith would issue a receipt to the depositor. After a time, these receipts themselves began to be traded for goods, and were backed 100 percent by gold. Then, Goldsmiths realized that they could lend out some of this gold without any fear of running out. Now there were more claims than there were ounces of gold. run on a bank Occurs when many of those who have claims on a bank (deposits) present them at the same time.