1. 13
C H A P T E R
Money and Banking

2. FUNCTIONS OF MONEY
Medium of Exchange
Unit of Account
Store of Value

3. MONEY SUPPLY Definition… Currency Checkable Deposits M1 Token Money
Federal Reserve Notes
Intrinsic Value
Checkable Deposits
Commercial Banks
Thrift Institutions

4. = Plus... MONEY SUPPLY Near-monies Savings Deposits
Money Market Deposit Accounts (MMDAs)
Smaller Time Deposits
Money Market Mutual Funds (MMMFs)

5. MONEY SUPPLY = M3 M2
Plus...
Large Time Deposits
Illustrated…

6. MONEY SUPPLY M1 M2 M3 plus Checkable deposits equals M1
Currency (coins & paper money)
plus Checkable deposits
equals M1
$1101
2000 Data
(billions of dollars)

7. MONEY SUPPLY plus Savings deposits, M1 M2 M3 plus Checkable deposits
Currency (coins & paper money)
plus Checkable deposits
equals M1
plus Savings deposits,
including MMDA’s
plus Small time deposits
plus Money market mutual fund
(MMMF) balances
equals M2
$1101
$4827
2000 Data
(billions of dollars)

8. MONEY SUPPLY plus Savings deposits, plus Savings deposits,
Currency (coins & paper money)
plus Checkable deposits
equals M1
plus Savings deposits,
including MMDA’s
plus Small time deposits
plus Money market mutual fund
(MMMF) balances
equals M2
Currency (coins & paper money)
plus Checkable deposits
equals M1
plus Savings deposits,
including MMDA’s
plus Small time deposits
plus Money market mutual fund
(MMMF) balances
equals M2
plus Large time deposits
equals M3
$1101
$4827
2000 Data
(billions of dollars)
$6853

9. WHAT ABOUT CREDIT CARDS?

10. Inflation and Acceptability
WHAT BACKS THE MONEY SUPPLY?
Money as Debt
Value of Money
Acceptability
Legal Tender
Relative Scarcity
Money and Prices
Value of the Dollar
D = 1/Price Level
Inflation and Acceptability

11. Stable Value! through... So, What Backs the Money Supply?
Appropriate Fiscal Policy
Intelligent Management of the Money Supply

12. illustrated... Transactions Demand, Dt Asset Demand, Da
THE DEMAND FOR MONEY
Transactions Demand, Dt
varies directly with nominal GDP
Asset Demand, Da
varies inversely with the interest rate
illustrated...

13. Rate of interest, i (percent)
THE DEMAND FOR MONEY +
Transactions
Demand, Dt
Rate of interest, i (percent)
Amount of money
demanded (billions
of dollars) Dt 10
7.5 5
2.5

14. Rate of interest, i (percent) Rate of interest, i (percent)
THE DEMAND FOR MONEY + =
Transactions
Demand, Dt
Asset
Demand, Da
Rate of interest, i (percent)
Amount of money
demanded (billions
of dollars) Dt 10
7.5 5
2.5
Rate of interest, i (percent)
Amount of money
demanded (billions
of dollars) 10
7.5 5
2.5 Da

15. + = THE DEMAND FOR MONEY Transactions Demand, Dt Asset Demand, Da
Total demand
for money, Dm
Rate of interest, i (percent)
Amount of money
demanded (billions
of dollars) Dt 10
7.5 5
2.5
Rate of interest, i (percent)
Amount of money
demanded (billions
of dollars) 10
7.5 5
2.5 Da
Rate of interest, i (percent)
Amount of money
demanded (billions
of dollars) 10
7.5 5
2.5 Dm

16. + = THE DEMAND FOR MONEY ADD THE MONEY SUPPLY TO FIND THE
Transactions
Demand, Dt
Asset
Demand, Da
Total demand
for money, Dm
ADD THE
MONEY SUPPLY
TO FIND THE
EQUILIBRIUM RATE
OF INTEREST
Rate of interest, i (percent)
Amount of money
demanded (billions
of dollars) Dt 10
7.5 5
2.5
Rate of interest, i (percent)
Amount of money
demanded (billions
of dollars) 10
7.5 5
2.5 Da
Rate of interest, i (percent)
Amount of money
demanded (billions
of dollars) 10
7.5 5
2.5 Dm Sm 10
7.5 5
2.5
Rate of interest, i (percent) ie
Amount of money
demanded (billions
of dollars)
Equilibrium
Interest Rate

17. Rate of interest, i (percent) Amount of money demanded
THE MONEY MARKET Sm 10
7.5 5
2.5
Suppose the money
supply is decreased
from $200 billion, Sm,
to $150 billion Sm1. ie
Rate of interest, i (percent) Dm
Amount of money demanded
(billions of dollars)

18. Rate of interest, i (percent) Amount of money demanded
THE MONEY MARKET
Sm1 Sm 10
7.5 5
2.5
A temporary shortage
of money will require
the sale of some assets
to meet the need. ie
Rate of interest, i (percent) Dm
Amount of money demanded
(billions of dollars)

19. Rate of interest, i (percent) Amount of money demanded
THE MONEY MARKET Sm 10
7.5 5
2.5
Suppose the money
supply is increased
from $200 billion, Sm,
to $250 billion Sm2. ie
Rate of interest, i (percent) Dm
Amount of money demanded
(billions of dollars)

20. Rate of interest, i (percent) Amount of money demanded
THE MONEY MARKET Sm
Sm2 10
7.5 5
2.5
A temporary surplus
of money will require
the purchase of some
assets to meet the de-
sired level of liquidity. ie
Rate of interest, i (percent) Dm
Amount of money demanded
(billions of dollars)

21. THE MONEY MARKET ie Bonds are assumed Sm Sm2 as a typical asset with
lower prices associated
with higher
interest rates Sm
Sm2 10
7.5 5
2.5
A temporary surplus
of money will require
the purchase of some
assets to meet the de-
sired level of liquidity. ie
Rate of interest, i (percent) Dm
Amount of money demanded
(billions of dollars)

22. THE FEDERAL RESERVE AND
THE BANKING SYSTEM
Centralization and Public Control
Board of Governors
Assistance & Advice
Federal Open Market Committee
Three Advisory Councils
The 12 Federal Reserve Banks
Central Bank Role
Quasi-Public Banks
Banker’s Banks
Commercial Banks & Thrifts

23. THE FEDERAL RESERVE AND THE BANKING SYSTEM
Open Market
Committee
Advisory
Councils
Board of
Governors
12 Federal
Reserve Banks
Commercial
Banks
Thrift Institutions
(Savings & loan associations,
mutual savings banks, credit unions)
The Public
(Households and
businesses)

24. Setting Reserve Requirements & Holding Reserves
FED Functions & the Money Supply
Issuing Currency
Setting Reserve Requirements & Holding Reserves
Lending Money to Banks & Thrifts
Providing for Check Collection
Acting as Fiscal Agent
Supervising Banks
Controlling the Money Supply

25. Federal Reserve Independence Recent Developments
FED Functions & the Money Supply
Federal Reserve Independence
Recent Developments
Relative Decline of Banks and Thrifts
Financial Services Industry
Consolidation Among Banks and Thrifts
Globalization of Financial Markets
Electronic Transactions

26. Chapter Conclusions Federal Reserve Independence Recent Developments
FED Functions & the Money Supply
Federal Reserve Independence
Recent Developments
Relative Decline of Banks and Thrifts
Financial Services Industry
Consolidation Among Banks and Thrifts
Globalization of Financial Markets
Electronic Transactions
Chapter
Conclusions

27. KEY TERMS 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 2002
BACK
END

28. How Banks and Thrifts Create Money
Coming up next...
How Banks and Thrifts Create Money
Chapter 14