Money Supply and other notions about Money!

Amount of money in circulation is constantly changing. The amount depends on how much money is desired by individuals and businesses. Amount of money in circulation is constantly changing. The amount depends on how much money is desired by individuals and businesses. Supply of money automatically expands and contracts with the needs of business. Supply of Money:

What is our Money Supply? Typically, what the FED calls M1 money

M1 Money Currency (held outside of banks)Currency (held outside of banks) Demand DepositsDemand Deposits Traveler ’ s checksTraveler ’ s checks Other checkable depositsOther checkable deposits – Money Market Funds

M1 Money 1. Coin about 2-3% of total M1 for convenience money; often called token money because intrinsic value is less than the face value. 2. Paper money is 51% of total M1 in the form of Federal Reserve Notes (Jan 2010) NOTE: M1 excludes currency held in the bank vault or deposited in Federal Reserve Banks or held by US Treasury √ Currency

Checks are 48% of total M1, used for 90% of transactions ( offered by commercial banks, thrift institutions, and credit unions ); called demand deposits, Automatic Transfer Service and Share Draft Accounts. Checks are 48% of total M1, used for 90% of transactions ( offered by commercial banks, thrift institutions, and credit unions ); called demand deposits, Automatic Transfer Service and Share Draft Accounts. NOTE: Currency and checkable deposits owned by the US Treasury, the FED, commercial banks and other financial institutions are not counted as M1. M1 Money √ Checkable Deposits

Near Monies… highly liquid financial assets that do not directly function as medium of exchange but can be easily converted into currency or checkable deposits. M2 Money Supply

1) Spending habits: the greater the amount of financial wealth held as near money, the greater the willingness to spend out of current income 2) Stability: easy conversion from near money to M1 supply may force inflation to occur 3) Policy: complicates actions to be taken. Importance of Near Monies

M2 Money M1 plus: savings accounts, money market mutual funds, money market deposit accounts, and small- denomination time deposits

Money Defined M1M1M2M2 51% 48% M1M1 20% Savings Deposits Including Money Market Deposit Accounts (MMDA) Small Time Deposits Money Market Mutual Funds Held By Individuals (MMMF) Currency Checkable Deposits 15% 11% 54% $1,676 Billion $8,463 Billion January 2010 Totals % Trav Check

Does gold or silver back up our money? No, our money is not backed up by anything

… Paper Money is the circulating debt of the Federal Reserve Banks. … Checkable Deposits are the debts of commercial banks and thrift institutions. … Paper Money has no intrinsic value; it cannot be redeemed in gold or other “ valued ” item. Money as Debt

Acceptability : confident money is tradable for goods and services Acceptability : confident money is tradable for goods and services Legal tender: matter of law (creditor must accept or forfeit right to sue or charge interest) and government will accept money in payment of taxes. Checks do not have this status. Legal tender: matter of law (creditor must accept or forfeit right to sue or charge interest) and government will accept money in payment of taxes. Checks do not have this status. Relative scarcity: demand (utility related to acceptance for goods and services) and supply (controlled by FED) relationship Relative scarcity: demand (utility related to acceptance for goods and services) and supply (controlled by FED) relationship Value of Money

Purchasing power of money is the real value. Purchasing power of money is the real value. The amount a dollar will buy varies inversely with the price level. The amount a dollar will buy varies inversely with the price level. D = 1/P D=Value of the $ P= Price level Money and Prices