1. Copyright McGraw-Hill, Inc. 1999 Money & Banking FUNCTIONS OF MONEY SUPPLY OF MONEY DEMAND FOR MONEY MONEY MARKET U.S. FINANCIAL SYSTEM CHAPTER THIRTEEN

2. Copyright McGraw-Hill, Inc. 1999 Functions of Money Medium of Exchange

3. Copyright McGraw-Hill, Inc. 1999 Functions of Money Medium of Exchange Unit of Account Medium of Exchange Unit of Account

4. Copyright McGraw-Hill, Inc. 1999 Functions of Money Medium of Exchange Unit of Account Store of Value Medium of Exchange Unit of Account Store of Value

5. Copyright McGraw-Hill, Inc. 1999 Money Definition

6. Copyright McGraw-Hill, Inc. 1999 Money Definition Currency Token Money Intrinsic Value Currency Token Money Intrinsic Value

7. Copyright McGraw-Hill, Inc. 1999 Money Definition Currency Token Money Intrinsic Value Currency Token Money Intrinsic Value Federal Reserve Notes

8. Copyright McGraw-Hill, Inc. 1999 Money Definition Currency Token Money Intrinsic Value Currency Token Money Intrinsic Value Checkable Deposits Commercial Banks Thrift Institutions Savings & Loan Associations Checkable Deposits Commercial Banks Thrift Institutions Savings & Loan Associations

9. Copyright McGraw-Hill, Inc. 1999 Money Definition Currency Token Money Intrinsic Value Checkable Deposits Commercial Banks Thrift Institutions Savings & Loan Associations Currency Token Money Intrinsic Value Checkable Deposits Commercial Banks Thrift Institutions Savings & Loan Associations Mutual Savings Banks

10. Copyright McGraw-Hill, Inc. 1999 Money Definition Currency Token Money Intrinsic Value Checkable Deposits Commercial Banks Thrift Institutions Savings & Loan Associations Currency Token Money Intrinsic Value Checkable Deposits Commercial Banks Thrift Institutions Savings & Loan Associations Mutual Savings Banks Credit Unions

11. Copyright McGraw-Hill, Inc. 1999 Money Definition = = Plus...

12. Copyright McGraw-Hill, Inc. 1999 Money Definition Near-monies = = Plus...

13. Copyright McGraw-Hill, Inc. 1999 Money Definition Near-monies Noncheckable Savings Accounts Near-monies Noncheckable Savings Accounts = = Plus...

14. Copyright McGraw-Hill, Inc. 1999 Money Definition Near-monies Noncheckable Savings Accounts Money Market Deposit Accounts Near-monies Noncheckable Savings Accounts Money Market Deposit Accounts = = Plus...

15. Copyright McGraw-Hill, Inc. 1999 Money Definition Near-monies Noncheckable Savings Accounts Money Market Deposit Accounts Time Deposits Near-monies Noncheckable Savings Accounts Money Market Deposit Accounts Time Deposits = = Plus...

16. Copyright McGraw-Hill, Inc. 1999 Money Definition Near-monies Noncheckable Savings Accounts Money Market Deposit Accounts Time Deposits Money Market Mutual Funds Near-monies Noncheckable Savings Accounts Money Market Deposit Accounts Time Deposits Money Market Mutual Funds = = Plus...

17. Copyright McGraw-Hill, Inc. 1999 Money Definition Large Time Deposits = = Plus... Specifically in 1997...

18. Copyright McGraw-Hill, Inc. 1999 The Supply of Money Currency (coins & paper money) plus Checkable deposits 1997 Data (billions of dollars)

19. Copyright McGraw-Hill, Inc. 1999 The Supply of Money Currency (coins & paper money) plus Checkable deposits M1 equals M1 M1 $1057 1997 Data (billions of dollars)

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

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

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

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

24. Copyright McGraw-Hill, Inc. 1999 What about credit cards?

25. Copyright McGraw-Hill, Inc. 1999 What Backs the Money Supply?

26. Copyright McGraw-Hill, Inc. 1999 What Backs the Money Supply? Money as Debt

27. Copyright McGraw-Hill, Inc. 1999 What Backs the Money Supply? Money as Debt Value of Money Money as Debt Value of Money

28. Copyright McGraw-Hill, Inc. 1999 What Backs the Money Supply? Money as Debt Value of Money Acceptability Money as Debt Value of Money Acceptability

29. Copyright McGraw-Hill, Inc. 1999 What Backs the Money Supply? Money as Debt Value of Money Acceptability Legal Tender Money as Debt Value of Money Acceptability Legal Tender

30. Copyright McGraw-Hill, Inc. 1999 What Backs the Money Supply? Money as Debt Value of Money Acceptability Legal Tender Fiat Money Money as Debt Value of Money Acceptability Legal Tender Fiat Money

31. Copyright McGraw-Hill, Inc. 1999 What Backs the Money Supply? Money as Debt Value of Money Acceptability Legal Tender Relative Scarcity Money as Debt Value of Money Acceptability Legal Tender Relative Scarcity

32. Copyright McGraw-Hill, Inc. 1999 What Backs the Money Supply? Money as Debt Value of Money Acceptability Legal Tender Relative Scarcity Money and Prices Money as Debt Value of Money Acceptability Legal Tender Relative Scarcity Money and Prices

33. Copyright McGraw-Hill, Inc. 1999 What Backs the Money Supply? Money as Debt Value of Money Acceptability Legal Tender Relative Scarcity Money and Prices Value of the Dollar Money as Debt Value of Money Acceptability Legal Tender Relative Scarcity Money and Prices Value of the Dollar

34. Copyright McGraw-Hill, Inc. 1999 What Backs the Money Supply? Money as Debt Value of Money Acceptability Legal Tender Relative Scarcity Money and Prices Value of the Dollar Money as Debt Value of Money Acceptability Legal Tender Relative Scarcity Money and Prices Value of the Dollar NOTES: Reciprocal relationship between the price level and the value of the dollar. D = 1 P

35. Copyright McGraw-Hill, Inc. 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 Money as Debt Value of Money Acceptability Legal Tender Relative Scarcity Money and Prices Value of the Dollar Inflation and Acceptability

36. Copyright McGraw-Hill, Inc. 1999 Maintaining Money’s Value What backs the money supply?

37. Copyright McGraw-Hill, Inc. 1999 Maintaining Money’s Value What backs the money supply? Stable Value! through....

38. Copyright McGraw-Hill, Inc. 1999 Maintaining Money’s Value What backs the money supply? Stable Value! through.... Appropriate fiscal policy

39. Copyright McGraw-Hill, Inc. 1999 Maintaining Money’s Value What backs the money supply? Stable Value! through.... Appropriate fiscal policy Intelligent management of the money supply Appropriate fiscal policy Intelligent management of the money supply

40. Copyright McGraw-Hill, Inc. 1999 The Demand For Money

41. Copyright McGraw-Hill, Inc. 1999 The Demand For Money Transactions Demand, D 1 varies directly with nominal GDP

42. Copyright McGraw-Hill, Inc. 1999 The Demand For Money Transactions Demand, D 1 varies directly with nominal GDP Asset Demand, D 2 varies inversely with the interest rate illustrated....

43. 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 Copyright McGraw-Hill, Inc. 1999

44. Transactions Demand, D t Asset Demand, D a += Rate of interest, i (percent) Amount of money demanded (billions of dollars) Amount of money demanded (billions of dollars) DtDt 10 7.5 5 2.5 0 10 7.5 5 2.5 0 DaDa 0 50 100 150 200 250 300 The Demand For Money Copyright McGraw-Hill, Inc. 1999

45. Transactions Demand, D t Asset Demand, D a Total demand for money, D m += Rate of interest, i (percent) Amount of money demanded (billions of dollars) Amount of money demanded (billions of dollars) Amount of money demanded (billions of dollars) 0 50 100 150 200 250 300 DtDt 10 7.5 5 2.5 0 10 7.5 5 2.5 0 10 7.5 5 2.5 0 DaDa 0 50 100 150 200 250 300 DmDm The Demand For Money Copyright McGraw-Hill, Inc. 1999

46. Transactions Demand, D t Asset Demand, D a Total demand for money, D m += Rate of interest, i (percent) Amount of money demanded (billions of dollars) Amount of money demanded (billions of dollars) Amount of money demanded (billions of dollars) 0 50 100 150 200 250 300 DtDt 10 7.5 5 2.5 0 10 7.5 5 2.5 0 10 7.5 5 2.5 0 DaDa 0 50 100 150 200 250 300 DmDm ADD THE MONEY SUPPLY TO FIND THE EQUILIBRIUM RATE OF INTEREST ADD THE MONEY SUPPLY TO FIND THE EQUILIBRIUM RATE OF INTEREST The Demand For Money Copyright McGraw-Hill, Inc. 1999

47. Transactions Demand, D t Asset Demand, D a Total demand for money, D m += Rate of interest, i (percent) Amount of money demanded (billions of dollars) Amount of money demanded (billions of dollars) Amount of money demanded (billions of dollars) 0 50 100 150 200 250 300 DtDt 10 7.5 5 2.5 0 10 7.5 5 2.5 0 10 7.5 5 2.5 0 DaDa 0 50 100 150 200 250 300 SmSm DmDm Equilibrium Interest Rate ieie The Demand For Money Copyright McGraw-Hill, Inc. 1999

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

49. Copyright McGraw-Hill, Inc. 1999 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

50. Copyright McGraw-Hill, Inc. 1999 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 Bonds are assumed as a typical asset with lower prices associated with higher interest rates Bonds are assumed as a typical asset with lower prices associated with higher interest rates The Money Market

51. Copyright McGraw-Hill, Inc. 1999 Rate of interest, i (percent) Amount of money demanded (billions of dollars) 10 7.5 5 2.5 0 DmDm ieieieie After adjustments to asset holdings, a new equilibrium will be seen at a higher level of interest. S m1 0 50 100 150 200 250 300 The Money Market

52. Copyright McGraw-Hill, Inc. 1999 Rate of interest, i (percent) Amount of money demanded (billions of dollars) 10 7.5 5 2.5 0 DmDm ieie SmSm 0 50 100 150 200 250 300 Suppose the money supply is increased from $200 billion, S m, to $250 billion S m2. The Money Market

53. Copyright McGraw-Hill, Inc. 1999 Rate of interest, i (percent) Amount of money demanded (billions of dollars) 10 7.5 5 2.5 0 DmDm ieie SmSm S m2 0 50 100 150 200 250 300 A temporary surplus of money will require the purchase of some assets to meet the de- sired level of liquidity. The Money Market

54. Copyright McGraw-Hill, Inc. 1999 Rate of interest, i (percent) Amount of money demanded (billions of dollars) 10 7.5 5 2.5 0 DmDm ieie S m2 0 50 100 150 200 250 300 After adjustments to asset holdings, a new equilibrium will be seen at a lower level of interest. The Money Market

55. Copyright McGraw-Hill, Inc. 1999 The United States Financial System

56. Copyright McGraw-Hill, Inc. 1999 The Federal Reserve System The United States Financial System

57. Copyright McGraw-Hill, Inc. 1999 The Federal Reserve System Board of Governors The United States Financial System

58. Copyright McGraw-Hill, Inc. 1999 The Federal Reserve System Board of Governors Assistance & Advice Board of Governors Assistance & Advice The United States Financial System

59. Copyright McGraw-Hill, Inc. 1999 The Federal Reserve System Board of Governors Assistance & Advice Federal Open Market Committee Board of Governors Assistance & Advice Federal Open Market Committee The United States Financial System

60. Copyright McGraw-Hill, Inc. 1999 The Federal Reserve System Board of Governors Assistance & Advice Federal Open Market Committee Three Advisory Councils Board of Governors Assistance & Advice Federal Open Market Committee Three Advisory Councils The United States Financial System

61. Copyright McGraw-Hill, Inc. 1999 The Federal Reserve System Board of Governors Assistance & Advice Federal Open Market Committee Three Advisory Councils The Twelve Federal Reserve Banks Board of Governors Assistance & Advice Federal Open Market Committee Three Advisory Councils The Twelve Federal Reserve Banks The United States Financial System

62. Copyright McGraw-Hill, Inc. 1999 The Federal Reserve System Board of Governors Assistance & Advice Federal Open Market Committee Three Advisory Councils The Twelve Federal Reserve Banks Central Bank Role Board of Governors Assistance & Advice Federal Open Market Committee Three Advisory Councils The Twelve Federal Reserve Banks Central Bank Role The United States Financial System

63. Copyright McGraw-Hill, Inc. 1999 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 Board of Governors Assistance & Advice Federal Open Market Committee Three Advisory Councils The Twelve Federal Reserve Banks Central Bank Role Quasipublic Banks The United States Financial System

64. Copyright McGraw-Hill, Inc. 1999 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 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 The United States Financial System

65. Copyright McGraw-Hill, Inc. 1999 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 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 The United States Financial System

66. Copyright McGraw-Hill, Inc. 1999 FED Functions and the Money Supply

67. Copyright McGraw-Hill, Inc. 1999 FED Functions and the Money Supply Issuing Currency

68. Copyright McGraw-Hill, Inc. 1999 FED Functions and the Money Supply Issuing Currency Setting Reserve Requirements & Holds Reserves Issuing Currency Setting Reserve Requirements & Holds Reserves

69. Copyright McGraw-Hill, Inc. 1999 FED Functions and the Money Supply Issuing Currency Setting Reserve Requirements & Holds Reserves Lending Money to Banks & Thrifts Issuing Currency Setting Reserve Requirements & Holds Reserves Lending Money to Banks & Thrifts

70. Copyright McGraw-Hill, Inc. 1999 FED Functions and the Money Supply Issuing Currency Setting Reserve Requirements & Holds Reserves Lending Money to Banks & Thrifts Check Collection Issuing Currency Setting Reserve Requirements & Holds Reserves Lending Money to Banks & Thrifts Check Collection

71. Copyright McGraw-Hill, Inc. 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 Issuing Currency Setting Reserve Requirements & Holds Reserves Lending Money to Banks & Thrifts Check Collection Fiscal Agents for the Federal Government

72. Copyright McGraw-Hill, Inc. 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 Issuing Currency Setting Reserve Requirements & Holds Reserves Lending Money to Banks & Thrifts Check Collection Fiscal Agents for the Federal Government Supervision of Member Banks

73. Copyright McGraw-Hill, Inc. 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 Control of 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 Control of the Money Supply

74. Copyright McGraw-Hill, Inc. 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 Control of 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 Control of the Money Supply NOTES: Federal Reserve Independence from Federal Government Federal Reserve Independence from Federal Government

75. Copyright McGraw-Hill, Inc. 1999 Recent Developments Relative Decline of Banks & Thrifts

76. Copyright McGraw-Hill, Inc. 1999 Recent Developments Relative Decline of Banks & Thrifts Expansion of Services Relative Decline of Banks & Thrifts Expansion of Services

77. Copyright McGraw-Hill, Inc. 1999 Recent Developments Relative Decline of Banks & Thrifts Expansion of Services Mergers Relative Decline of Banks & Thrifts Expansion of Services Mergers

78. Copyright McGraw-Hill, Inc. 1999 Recent Developments Relative Decline of Banks & Thrifts Expansion of Services Mergers Regulatory Reform Relative Decline of Banks & Thrifts Expansion of Services Mergers Regulatory Reform

79. Copyright McGraw-Hill, Inc. 1999 Recent Developments Relative Decline of Banks & Thrifts Expansion of Services Mergers Regulatory Reform Market Globalization Relative Decline of Banks & Thrifts Expansion of Services Mergers Regulatory Reform Market Globalization

80. Copyright McGraw-Hill, Inc. 1999 Recent Developments Relative Decline of Banks & Thrifts Expansion of Services Mergers Regulatory Reform Market Globalization Electronic Money Relative Decline of Banks & Thrifts Expansion of Services Mergers Regulatory Reform Market Globalization Electronic Money

81. Copyright McGraw-Hill, Inc. 1999 Recent Developments Relative Decline of Banks & Thrifts Expansion of Services Mergers Regulatory Reform Market Globalization Electronic Money E-Cash Relative Decline of Banks & Thrifts Expansion of Services Mergers Regulatory Reform Market Globalization Electronic Money E-Cash

82. Copyright McGraw-Hill, Inc. 1999 Recent Developments Relative Decline of Banks & Thrifts Expansion of Services Mergers Regulatory Reform Market Globalization Electronic Money E-Cash Smart Cards Relative Decline of Banks & Thrifts Expansion of Services Mergers Regulatory Reform Market Globalization Electronic Money E-Cash Smart Cards

83. Copyright McGraw-Hill, Inc. 1999 Recent Developments Relative Decline of Banks & Thrifts Expansion of Services Mergers Regulatory Reform Market Globalization Electronic Money E-Cash Smart Cards Relative Decline of Banks & Thrifts Expansion of Services Mergers Regulatory Reform Market Globalization Electronic Money E-Cash Smart Cards Questions and Discussion Questions and Discussion

84. u medium of exchange u unit of account u store of value u M1, M2, M3 u token money u intrinsic value u Federal Reserve Notes u checkable deposits u thrift (savings) institutions u savings & loan associations u mutual savings banks u credit unions u near-monies u noncheckable deposits u money market deposit account u time deposits u money market mutual fund u legal tender u fiat money u transactions demand u asset demand u total demand for money u money market u Federal Reserve System u Board of Governors u Federal Open Market Committee u Advisory Councils u Federal Reserve Banks u commercial banks u E-cash u smart cards Copyright McGraw-Hill, Inc. 1999

85. How Banks Create Money Chapter 14 Coming up next...