2. 13 - 1 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show 13 C H A P T E R Money and Banking

3. 13 - 2 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show FUNCTIONS OF MONEY Medium of Exchange Unit of Account Store of Value

4. 13 - 3 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show MONEY SUPPLY Currency Token Money Federal Reserve Notes Little Intrinsic Value Checkable Deposits Commercial Banks Thrift Institutions Definition…

5. 13 - 4 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show MONEY SUPPLY = Plus... Near-monies Savings Deposits Money Market Deposit Accounts (MMDAs) Smaller Time Deposits Money Market Mutual Funds (MMMFs)

6. 13 - 5 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show MONEY SUPPLY = Plus... Large Time Deposits Illustrated…

7. 13 - 6 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show Currency (coins & paper money) plus Checkable deposits equals M1 M1M2M3 $1236 2003 Data (billions of dollars) MONEY SUPPLY

8. 13 - 7 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show M1M2M3 $1236 2003 Data (billions of dollars) $5899 MONEY SUPPLY Currency (coins & paper money) plus Checkable deposits equals M1 plus Savings deposits, including MMDAs plus Small time deposits plus Money market mutual fund (MMMF) balances equals M2

9. 13 - 8 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show M1M2M3 $1236 2003 Data (billions of dollars) $5899 $8595 MONEY SUPPLY Currency (coins & paper money) plus Checkable deposits equals M1 plus Savings deposits, including MMDAs plus Small time deposits plus Money market mutual fund (MMMF) balances equals M2 plus Large time deposits equals M3 Currency (coins & paper money) plus Checkable deposits equals M1 plus Savings deposits, including MMDAs plus Small time deposits plus Money market mutual fund (MMMF) balances equals M2

10. 13 - 9 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show WHAT ABOUT CREDIT CARDS?

11. 13 - 10 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show WHAT BACKS THE MONEY SUPPLY? Money as Debt Value of Money Acceptability Legal Tender Relative Scarcity Money and Prices Purchasing Power of Money D = 1/Price Level Inflation and Acceptability

12. 13 - 11 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show WHAT BACKS THE MONEY SUPPLY? So, What Backs the Money Supply? Stable Value! through... Appropriate Fiscal Policy Intelligent Management of the Money Supply – Monetary Policy

13. 13 - 12 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show THE DEMAND FOR MONEY Transactions Demand, D t varies directly with nominal GDP Asset Demand, D a varies inversely with the interest rate Liquidity Preference illustrated...

14. 13 - 13 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show + 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

15. 13 - 14 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show += 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

16. 13 - 15 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show += 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

17. 13 - 16 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show += 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 SmSm Equilibrium Interest Rate ieie 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 ADD THE MONEY SUPPLY TO FIND THE EQUILIBRIUM RATE OF INTEREST

18. 13 - 17 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show 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.

19. 13 - 18 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show 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

20. 13 - 19 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show 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.

21. 13 - 20 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show 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.

22. 13 - 21 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show 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. Bonds are assumed as a typical asset with lower prices associated with higher interest rates

23. 13 - 22 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show Centralization and Public Control Board of Governors Assistance & Advice Federal Open Market Committee (FOMC) The 12 Federal Reserve Banks Central Bank Role Quasi-Public Banks Bankers Banks Commercial Banks & Thrifts THE FEDERAL RESERVE AND THE BANKING SYSTEM

24. 13 - 23 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show THE FEDERAL RESERVE AND THE BANKING SYSTEM Federal Open Market Committee Board of Governors 12 Federal Reserve Banks Commercial Banks Thrift Institutions (Savings & loan associations, mutual savings banks, credit unions) The Public (Households and businesses)

25. 13 - 24 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show FED Functions & the Money Supply Issuing Currency Setting Reserve Requirements & Holding Reserves Lending Money to Banks & Thrifts Discount Rate Providing for Check Collection Acting as Fiscal Agent Supervising Banks Controlling the Money Supply

26. 13 - 25 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show FED Functions & the Money Supply Federal Reserve Independence Recent Developments Relative Decline of Banks and Thrifts Financial Services Industry Consolidation Among Banks and Thrifts Convergence of Services Provided by Financial Institutions Globalization of Financial Markets Electronic Transactions

27. ENDBACK medium of exchange unit of account store of value M1, M2, M3 token money Federal Reserve Notes checkable deposits commercial banks thrift institutions near-monies savings account money market deposit account (MMDA) time deposits money market mutual fund (MMMF) legal tender transactions demand asset demand total demand for money money market Federal Reserve System Board of Governors Federal Open Market Committee (FOMC) Federal Reserve Banks financial services industry electronic transactions Copyright McGraw-Hill/Irwin, Inc. 2005

28. 13 - 27 Copyright McGraw-Hill/Irwin, 2005 Functions of Money What Backs the Money Supply Demand for Money The Money Market The Federal Reserve & the Banking System FED Functions & the Money Supply Key Terms Previous Slide Next Slide End Show How Banks and Thrifts Create Money Chapter 14 Coming up next...