2. 14 - 2 Bitcoin More on bitcoin Ted Talk

3. 14 - 3 Bitcoin Ted Talk

4. 14 - 4 Anything widely used and freely accepted as payment for goods and services What Is Money?

5. 14 - 5 The Functions of Money Medium of Exchange Store of Value Unit of Account/ Measure of Value

6. 14 - 6 Portability Divisibility Durability Recognizable Relative scarcity What Is Money?

7. 14 - 7 The Cost of Producing U.S. Coins Golden Dollar 10.03 cents Half Dollar 9.93 cents Quarter 4.29 cents Dime 1.88 cents Nickel 3.13 cents Penny.81 cents Source: http://www.usmint.gov/faqs/circulating_coins

8. 14 - 8 Commodity – money with intrinsic value Representative – convertible or commodity-backed money Fiat – value derived from official status, acceptability Kinds of Money

9. 14 - 9 Just How Much Is a Ton of Money Worth? The Time Value of Money The Time Value of Money Dollar Bills $908,000 Quarters $40,000 Pennies $3,632 Source: State of Michigan Office of Financial and Insurance Services, www.cis.state.mi.us/ofic/consumer/kids/ton_money www.cis.state.mi.us/ofic/consumer/kids/ton_money

10. 14 - 10 The Money Supply M1: Spendable Currency Demand deposits M2: Spendable plus Convertible (M1 + near money) Time deposits Money market mutual funds Savings deposit

11. 14 - 11 More than half of the M1 is currency The rest is demand deposits The Monetary Role of Banks

12. 14 - 12 What Banks Do What Banks DoBanks Financial Intermediary Bank Reserves T - Account Assets & Liabilities Reserve Ratio Required Reserve Ratio

13. 14 - 13 The Problem of Bank Runs The Problem of Bank Runs Customer Deposits > Bank Reserves Why does this usually work? Bank Run Why? Bank Failure

14. 14 - 14 Bank Regulation Bank Regulation Deposit Insurance FDIC Capital Requirements Reserve Requirements The Discount Window

15. 14 - 15 19641969197419841984198919942001 5.45.0 4.4 4.0 3.4 3.0 2.4 2.0 1.4 1.0 0 0.4 Money Supply (trillions) Money Supply Growth M-1 M-2

16. 14 - 16 Determining the Money Supply

17. 14 - 17 How Banks Create Money How Banks Create Money

18. 14 - 18 Reserves, Bank Deposits, and the Money Multiplier Reserves, Bank Deposits, and the Money Multiplier “Leaks” Excess Reserves rr = reserve ratio Loan Expansion = Excess Reserves / rr MM = 1/rr

19. 14 - 19 The Money Multiplier in Reality The Money Multiplier in Reality Monetary Base Money Multiplier Each dollar of bank reserves backs several dollars of bank deposits, making the money supply larger than the monetary base.

20. 14 - 20 Table 25.1 How Banks Create Money Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers Assumes a reserve ration of 10%

21. 14 - 21 Figure 25.3 Effect on the Money Supply of Turning Cash into a Checkable Deposit at First Street Bank Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

22. 14 - 22 Insert Federal Reserve here

23. The Money Market (Supply and Demand for Money) 23

24. 14 - 24 Demand for Money Transactions Demand – medium of exchange demand; directly related to changes in nominal GDP

25. 14 - 25 Demand for Money cont. Asset Demand – store of value demand; inversely related to the interest rate

26. 14 - 26 Demand for Money cont. Total Money Demand – transaction + asset directly related to nominal GDP

27. The Demand for Money At any given time, people demand a certain amount of liquid assets (money) for everyday purchases The Demand for money shows an inverse relationship between nominal interest rates and the quantity of money demanded 1. What happens to the quantity demanded of money when interest rates increase? Quantity demanded falls because individuals would prefer to have interest earning assets instead 2. What happens to the quantity demanded when interest rates decrease? Quantity demanded increases. There is no incentive to convert cash into interest earning assets 27

28. Nominal Interest Rate (ir) Quantity of Money (billions of dollars) 20% 5% 2% 0 D Money Inverse relationship between interest rates and the quantity of money demanded 28 The Demand for Money

29. Quantity of Money (billions of dollars) 20% 5% 2% 0 D Money What happens if price level increase? 29 The Demand for Money D Money1 Money Demand Shifters 1.Changes in price level 2.Changes in income 3.Changes in taxation that affects personal investment Nominal Interest Rate (ir)

30. The Demand for Money At any given time, people demand a certain amount of liquid assets (money) for everyday purchases The Demand for money shows an inverse relationship between nominal interest rates and the quantity of money demanded 1. What happens to the quantity demanded of money when interest rates increase? Quantity demanded falls because individuals would prefer to have interest earning assets instead 2. What happens to the quantity demanded when interest rates decrease? Quantity demanded increases. There is no incentive to convert cash into interest earning assets 30

31. 200 D Money S Money The FED is a nonpartisan government office that sets and adjusts the money supply to adjust the economy This is called Monetary Policy. The U.S. Money Supply is set by the Board of Governors of the Federal Reserve System (FED) 31 The Supply for Money 20% 5% 2% Quantity of Money (billions of dollars) Interest Rate (ir)

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33. Why are there so many interest rates? 33