Presentation on theme: "The Money Supply and the Banking System Outline: What counts as money? Measuring the money stock Financial intermediaries The typical bank balance sheet."— Presentation transcript:
The Money Supply and the Banking System Outline: What counts as money? Measuring the money stock Financial intermediaries The typical bank balance sheet The fractional reserve system
An asset is considered liquid if it can be converted to cash quickly and with little cost
Least Liquid Most Liquid Bonds, Equities Specialized Equipment Home Equity Oriental Rugs, Jewelry Farm Land Money
Cash in circulation ($521 billion) Checkable deposits ($587 billion)+ Travelers Checks ($8 billion) Savings accounts ($1,737 billion) Money Market Mutual Funds ($873 billion) Monetary Assets January 31, 2000 Small Time Deposits ($963 billion) Large Time Deposits ($716 billion) Most Liquid Least Liquid
M1 includes Currency in circulation Traveler’s checks Checkable deposits at commercial banks Other checkable deposits (OCDs) 1 1 Includes NOW, ATS, credit union share draft accounts, and demand deposits
Source: Federal Reserve Bulletin OCDs means “other checkable deposits.” Components of M1, July 17, 2000 (in billions)
M2 includes M1 Savings deposits Small time deposits Money market mutual funds (MMMFs)
Components of M2, July 17, 2000 (in billions of dollars)
Financial Intermediaries We use this to term to describe businesses that specialize in brokering between depositors (savers) and borrowers. Institutions that are permitted by law to hold checkable deposits include: 1.Savings and loan associations (S & L’s) 2.Mutual savings banks 3.Credit unions 4.Commercial banks
Depository institutions are required by law to hold a minimum fraction of their deposit liabilities in a non- interest bearing account at the Federal Reserve Bank Legislation Federal Reserve Act of 1913 DIDMCA of 1982
Total reserves: Vault cash plus reserves on account at the Federal Reserve Bank (the “Fed”). Required reserves: The minimum amount a reserves a bank must hold to comply with the legal reserve requirement. Required reserve ratio: The minimum fraction of checking account balances (or deposit liabilities) that bank must hold as reserves.
Source: Federal Reserve Board Reserve Requirements in the U.S.