1. And Financial Institutions
Chapter 13
Money
And Financial Institutions

2. What is Money?
Money is anything generally accepted as a medium of exchange, a store of value, and a measure of value.
Stability
Portability
Durability
Uniformity
Divisibility
Recognizability

3. Different kinds of Money The Money Supply
Currency, travelers’ checks, demand deposits (checking accounts), other checkable deposits M2
M1 plus, small savings deposits, passbook/money market savings deposits, mutual fund money market accounts M3
M2 plus, institutional money market accounts, large savings deposits, eurodollars, other

4. What Banks Do History lesson Basic function of banks:
Collect funds from those that have no immediate need, pay interest on those funds, funnel them to borrowers
Accepting and holding deposits
Make loans (coordinate lenders and borrowers)
Collecting/transferring funds

5. Fractional Reserve Banking
How it started
It’s a wonderful life

6. Let’s make some money Required reserves Reserve ratio
Fixed portion of deposits that cannot be loaned
Reserve ratio
The percentage of reserves a bank is required to keep
Inverse relationship (teeter totter) between reserve ratio and the amount banks can lend

7. How does this create money?
Some of each deposit is kept (reserve ratio)
The total left is loaned to others
Is the money removed from the vault and given to borrowers?
Bank “creates” money by starting or adding to account
How much money will be created?
Deposit multiplier (100÷reserve ratio)

8. The FED The federal reserve system Entities of the Fed
The nation’s central bank
Entities of the Fed
Federal Reserve Banks (12 districts)
Board of governors (7 members)
Nominated by Pres. Confirmed by Senate
14 year term, one chairman (Greenspan)
Federal Open Market Committee FOMC
Increase/decrease reserves
Advisory Committees

9. What does the Fed do? Issues currency Processes checks/EFT
Hold reserves for banks
Required reserves (transferred nightly)
Banker to federal Government\
Tax payments, treasury department, bonds and securities

10. Value of money changes Inflation Deflation A period of rising prices.
Purchasing power of dollar falls.
More money required to purchase same bundle of goods.
Deflation
A time when prices are falling.
Purchasing power of dollar rises.
Less money required to purchase same bundle of goods.

11. How inflation happens Demand-pull inflation Cost-push inflation
Demand for goods/services increases faster than industry’s ability to produce more goods
Consumers bid up the price
Cost-push inflation
Prices rise due to increase in cost of production
Raw materials, wage-price (wages more than productivity), price-wage

12. Ouch! Inflation hurts Fixed income Savers Lenders Businesses
Cost of living goes up, income doesn’t
Savers
ROI must be more than inflation
Same money buys less
Lenders
Interest must be more than inflation
Same money buys less
Businesses
Increases production costs
Increases uncertainty

13. Inflation Make it hurt so good
Adjustable income
If increases are more than inflation rate
Borrowers
The money they repay is worth less
Interest less than inflation rate
Government
Income tax
Sales tax