1. Chapter 13 – Money & Banking

5. I.Three Jobs of Money:
A. Medium of Exchange
B. Unit of Account
(Standard of Value)
C. Store of Value

6. II.Our Money Supply:
A. M1:=Currency, demand deposits (checking accounts), traveler’s checks & other checkable deposits (NOW and Share Draft Accounts).
B. M2: = M1 + savings accounts, small time
deposits (CD’s) under $250,000, and non- institutional money market funds.
C. M3: = M2 + large time deposits – over
$250,000, institutional money market funds, short-term repurchase agreements, and other large non-liquid assets..
Are Credit Cards Money? No, a promise to pay.

7. III. What Backs the Money Supply?
- The U.S. governments ability to keep the
value of money relatively stable.
A. Money as Debt: Paper money
and checkable deposits are promises to
pay.
B. Value of Money-Determined by:
1. Acceptability – our confidence.
2. Legal Tender –Government designates
it as legal tender
3. Relative Scarcity – As managed by the government

8. C. Money & Prices:
1. Purchasing Power of the dollar – varies
inversely with prices.
2. Inflation & Acceptability – Runaway inflation
may cause money not to be accepted as a
medium of exchange.
D. Stabilization of Money’s
Value – Depends on the appropriate fiscal policy
and intelligent management of the economy by
the Federal Reserve.

9. IV. The Demand for Money:
A. Transactions Demand:
1. 1st Reason for holding money.
Focuses on holding money as a medium
of exchange.
2. The main determinant of transactions
demand is the level of Nominal GDP.
The larger GDP is, the higher the
transactions demand. A direct relationship.
3. The demand for money here is independent
of the interest rate.

10. Transaction Demand Graph
i% or
Nominal
Interest Rate
MDt
Quantity

11. B. Asset Demand for Money:
1. The second reason for holding money is
derived from people holding money as a
store of value.
2. People can hold their money as an asset or
invest it in financial assets such as stocks,
bonds, etc.
3. The key here is an inverse relationship
between money held as an asset and
interest rates.

12. Asset Demand For Money i%
MDa
Quantity

13. C. Total Demand for Money:
See graph for Money Market.
Money Market Graph is combination of Transaction Demand for money and Asset Demand for money

14. Money Market i% MS MD
Quantity

15. V. The Money Market:
1. Lower bond prices offered by the govt are associated with higher interest rates.
2. Higher bond prices offered by the govt are associated with lower interest rates.
An inverse relationship.

16. VI. The Federal Reserve System:
A. Establishment: Set up in
1913 as nation’s central bank.

17. Federal Reserve Building – Wash. D.C.

18. 1. Chairman: Serves a 4 year
B. Structure:
1. Chairman: Serves a 4 year
term as part of a 14 year term
as a member of the Board of
Governors.

19. Paul Volcker –

20. Allan Greespan

21. World’s Strongest Man ?

22. Ben Bernanke – 2005 to 2010

23. Janet Yellen – 2010 to present

24. 2. Board of Governors:
Are 7 members appointed by
the President and confirmed
by the Senate. They serve
14 year terms

25. 3. Federal Open Market
Committee:
12 people. 8 are permanent
members (7 members of the
Board of Governors and the
President of the NY Federal
Reserve District Office) and
the 4 others rotate from the
11 other District Banks.

27. FOMC Meeting Room

28. C. Federal Reserve’s Missions:
1. Financial Services – Bank
for Banks & U.S. Govt

30. 2. Monetary Policy
3. Supervisory & Regulatory
Role: Supervise State
Chartered member banks and
implement consumer
protection laws.