2. Chapter 10 Money and Banking Fun Facts DID YOU KNOW? The Bureau of Engraving and Printing produces 35 million notes a day with a face value of approximately $635 million. 95% of the notes printed each year are used to replace notes already in circulation. 45% of the notes printed are $1 notes. The first paper currency issued by the U.S. Department of the Treasury were Demand Notes Series 1861. During the Civil War period, the Bureau of Engraving and Printing was called upon to print paper notes in denominations of 3 cents, 5 cents, 10 cents, 25 cents, and 50 cents. The reason for this is that people hoarded coins because of their intrinsic value which created a drastic shortage of circulating coins.

3. In 1929, the size of currency was reduced to about 2/3's of its former size when production was converted to 12- subject plates. The familiar portraits and back designs of our currency were also established at that time. The approximate weight of a currency note, regardless of denomination is (1) one gram. There are 454 grams in one (1) U.S. pound, therefore, there should be 454 notes in (1) one pound(Avoirdupois system). If the troy system were used, there are (12) twelve ounces in (1) one pound; therefore, if one note weighs approximately (1) one gram, then (1) troy pound contains approximately 375 notes.

4. The New $5 and $100 Dollar Bills - U.S. Bureau of Engraving and PrintingThe New $5 and $100 Dollar Bills - U.S. Bureau of Engraving and Printing

5. A stack of currency one mile high would contain over 14½ million notes. If you had 10 billion $1 notes and spent one every second of every day, it would require 317 years for you to go broke. Currency paper is composed of 25% linen and 75% cotton. Red and blue synthetic fibers of various lengths are distributed evenly throughout the paper. Prior to World War I the fibers were made of silk. Between the Fort Worth, Texas and the Washington, DC Facilities approximately 18 tons of ink per day are used. Have you ever wondered how many times you could fold a piece of currency before it would tear? About 4,000 double folds (first forward and then backwards) are required before a note will tear. The following information regarding the average life of a Federal Reserve Note was provided by the Federal Reserve System - please note that the life of a note depends on its denomination: $ 1.............. 22 months $ 5................ 24 months $ 10................ 18 months $ 20............... 25 months $ 50............... 55 months $100.............. 60 months

6. Functions of Money What is the most important function of money? You want it to buy stuff for you! Medium of exchange

7. 2 nd Function of Money How do we know what a DVD player or an MP3 player is worth? Price Tag Standard of Value(Unit of Account) $3,500 from Best Buy $1800 from Wal-Mart

8. 3 rd Function of Money We want money to hold its value Store of Value Pumpkins-not a good store of value

9. Yap Island Money

10. Types of Money Commodity Money Wampum Salt

11. Types of Money Representative Money checking accounts Redeemable for gold

12. M1 (liquidity) M1 represents money that people can gain access to easily and immediately to pay for goods and services (cash & anything that can be directly converted into cash) –Currency, deposits in checking accounts (demand deposits), & travelers checks

13. M2 M2 consists of all the assets in M1 + deposits in savings accounts (b/c they can not be directly used as cash but can be converted to cash easily/Near Money) –Savings account, Money Market Mutual Funds,

14. Types of Money Fiat Money Legal Tender

15. Panic Runs FDIC Demand Deposits are ________________ Time Deposits are _________________ MI and M2 Are credit cards money? NO! Checking accounts Savings accounts

16. Your Assignment On a sheet of unlined paper Design your own currency (U.S. Currency) Front and Back (I have map colors) Is it time to put some new people on our bills? What should 21 st century money look like? Keep in appropriate for school Please decorate my door with your creation It doesn’t matter if you are not an artist, it’s the idea that counts!

17. THE DEMAND FOR MONEY Transactions Demand, D t varies directly with nominal GDP Asset Demand, D a varies inversely with the interest rate illustrated...

18. + Transactions Demand, D t Rate of interest, i (percent) Amount of money demanded (billions of dollars) DtDt 10 7.5 5 2.5 0 0 50 100 150 200 250 300 THE DEMAND FOR MONEY

19. += Transactions Demand, D t Asset Demand, D a Rate of interest, i (percent) Amount of money demanded (billions of dollars) DtDt 10 7.5 5 2.5 0 0 50 100 150 200 250 300 THE DEMAND FOR MONEY Rate of interest, i (percent) Amount of money demanded (billions of dollars) 10 7.5 5 2.5 0 DaDa 0 50 100 150 200 250 300

20. += Transactions Demand, D t Asset Demand, D a Total demand for money, D m 0 50 100 150 200 250 300 Rate of interest, i (percent) Amount of money demanded (billions of dollars) DtDt 10 7.5 5 2.5 0 0 50 100 150 200 250 300 THE DEMAND FOR MONEY Rate of interest, i (percent) Amount of money demanded (billions of dollars) 10 7.5 5 2.5 0 DaDa Rate of interest, i (percent) Amount of money demanded (billions of dollars) 0 50 100 150 200 250 300 10 7.5 5 2.5 0 DmDm

21. Rate of interest, i (percent) Amount of money demanded (billions of dollars) 0 50 100 150 200 250 300 10 7.5 5 2.5 0 DmDm ieie SmSm THE MONEY MARKET Suppose the money supply is decreased from $200 billion, S m, to $150 billion S m1.

22. Rate of interest, i (percent) Amount of money demanded (billions of dollars) 0 50 100 150 200 250 300 10 7.5 5 2.5 0 DmDm ieie SmSm A temporary shortage of money will require the sale of some assets to meet the need. S m1 THE MONEY MARKET

23. Bonds are sold to meet the shortage of money What will happen to the price of bonds if there is an increase in the supply of bonds? Bond prices will fall What will happen to the return (the interest rate) on a bond if it is sold for less than its face value? Ex. A $100 dollar interest payment on a $1,000 bond that sold for $800? 100 800 = 12.5% Simple but important point…

24. Rate of interest, i (percent) Amount of money demanded (billions of dollars) 0 50 100 150 200 250 300 10 7.5 5 2.5 0 DmDm ieie SmSm THE MONEY MARKET Suppose the money supply is increased from $200 billion, S m, to $250 billion S m2.

25. Rate of interest, i (percent) Amount of money demanded (billions of dollars) 0 50 100 150 200 250 300 10 7.5 5 2.5 0 DmDm ieie SmSm S m2 THE MONEY MARKET A temporary surplus of money will require the purchase of some assets to meet the de- sired level of liquidity.

26. We will assume that people will put the surplus of money in interest bearing accounts (bond market). If the demand for bonds goes up, the price of bonds will go … Up, so a $1,000 bond might sell for $1,200 The $100 interest payment to the bondholder that paid $1,200 now represents about 8 ½ % return.