10/22/20141 Money and Banking Chapter 09

2 Outline The Functions of Money The Functions of Money The Components of Money Supply The Components of Money Supply What “Backs” the Money Supply? What “Backs” the Money Supply? The Federal Reserve and the Banking System The Federal Reserve and the Banking System The Fractional Reserve System The Fractional Reserve System

10/22/20143 Outline A Commercial Bank A Commercial Bank The Banking System: Multiple-Deposit Expansion The Banking System: Multiple-Deposit Expansion

10/22/20144 The Functions of Money Medium of exchange Medium of exchange Unit of account Unit of account Store of value Store of value

10/22/20145 The Components of Money Supply Money definition: M1 Money definition: M1 –Currency: coins + paper money –Checkable deposits –Institutions that offer checkable deposits –Two qualifications

10/22/20146 The Components of Money Supply Money definition: M2 Money definition: M2 –Savings deposit, including money market deposit account –Small (less than $100,000) time deposits –Money market mutual funds

10/22/20147 What “Backs” the Money Supply? Value of money Value of money –Acceptability –Legal tender –Relative scarcity Money and prices Money and prices – The purchasing power of the dollar – Inflation and acceptability

10/22/20148 The Federal Reserve and the Banking System Board of Governors Board of Governors The 12 Federal Reserve banks The 12 Federal Reserve banks FOMC FOMC Commercial banks and thrifts Commercial banks and thrifts Fed functions and responsibilities Fed functions and responsibilities Federal Reserve independence Federal Reserve independence

10/22/20149 The Federal Reserve and the Banking System Fed functions and responsibilities Fed functions and responsibilities – Issuing currency – Setting reserve requirements and holding reserves – Lending money to financial institutions – Providing for check collection – Acting as fiscal agent – Supervising banks – Controlling the money supply

10/22/ The Fractional Reserve System The goldsmith The goldsmith

10/22/ A Single Commercial Bank Transaction 1: Creating a bank Transaction 1: Creating a bank Transaction 2: Acquiring property and equipment Transaction 2: Acquiring property and equipment Transaction 3: Accepting deposits Transaction 3: Accepting deposits

10/22/ A Single Commercial Bank Transaction 4: Depositing reserves in a Federal Reserve bank Transaction 4: Depositing reserves in a Federal Reserve bank – Required reserve – Excess reserve Transaction 5: Clearing a check drawn against the bank Transaction 5: Clearing a check drawn against the bank Transaction 6: Granting a loan (creating money) Transaction 6: Granting a loan (creating money)

10/22/ The Banking System: Multiple Deposit Expansion The banking system’s lending potential The banking system’s lending potential The monetary multiplier The monetary multiplier Reversibility: the multiple destruction of money Reversibility: the multiple destruction of money – The bank panics of 1830 to 1933