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13 - 1Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
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13C H A P T E R
Money and Banking
13 - 2Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
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FUNCTIONS OF MONEY
• Medium of Exchange
• Unit of Account
• Store of Value
13 - 3Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
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MONEY SUPPLY
Currency•Token Money•Federal Reserve Notes•Intrinsic Value
Checkable Deposits•Commercial Banks•Thrift Institutions
Definition…
13 - 4Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
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MONEY SUPPLY
= Plus...Near-moniesSavings Deposits•Money Market Deposit
Accounts (MMDAs)Smaller Time DepositsMoney Market Mutual Funds
(MMMFs)
13 - 5Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
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MONEY SUPPLY
= Plus...Large Time Deposits
Illustrated…
13 - 6Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
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Currency (coins & paper money)
plus Checkable deposits
equals M1
M1 M2 M3
$1101
2000 Data(billions of dollars)
MONEY SUPPLY
13 - 7Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
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M1 M2 M3
$1101
2000 Data(billions of dollars)
$4827
MONEY SUPPLYCurrency (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
13 - 8Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
PreviousSlide
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M1 M2 M3
$1101
2000 Data(billions of dollars)
$4827
$6853
MONEY SUPPLYCurrency (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
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
13 - 9Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
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WHAT ABOUT CREDIT CARDS?
13 - 10Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
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WHAT BACKS THE MONEY SUPPLY?
Money as DebtValue of Money
• Acceptability• Legal Tender• Relative Scarcity
Money and Prices• Value of the Dollar• D = 1/Price Level
Inflation and Acceptability
13 - 11Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
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WHAT BACKS THE MONEY SUPPLY?
So, What Backs the Money Supply?Stable Value!
through...• Appropriate Fiscal Policy• Intelligent Management
of the Money Supply
13 - 12Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
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THE DEMAND FOR MONEY
Transactions Demand, Dt
varies directly with nominal GDP
Asset Demand, Da
varies inversely with the interest rate
illustrated...
13 - 13Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
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+TransactionsDemand, Dt
Ra
te o
f in
tere
st,
i (
pe
rce
nt)
Amount of moneydemanded (billions
of dollars)
Dt
10
7.5
5
2.5
00 50 100 150 200 250 300
THE DEMAND FOR MONEY
13 - 14Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
PreviousSlide
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+ =TransactionsDemand, Dt
AssetDemand, Da
Ra
te o
f in
tere
st,
i (
pe
rce
nt)
Amount of moneydemanded (billions
of dollars)
Dt
10
7.5
5
2.5
00 50 100 150 200 250 300
THE DEMAND FOR MONEY
Ra
te o
f in
tere
st,
i (
pe
rce
nt)
Amount of moneydemanded (billions
of dollars)
10
7.5
5
2.5
0
Da
0 50 100 150 200 250 300
13 - 15Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
PreviousSlide
NextSlide
EndShow
+ =TransactionsDemand, Dt
AssetDemand, Da
Total demandfor money, Dm
0 50 100 150 200 250 300
Ra
te o
f in
tere
st,
i (
pe
rce
nt)
Amount of moneydemanded (billions
of dollars)
Dt
10
7.5
5
2.5
00 50 100 150 200 250 300
THE DEMAND FOR MONEY
Ra
te o
f in
tere
st,
i (
pe
rce
nt)
Amount of moneydemanded (billions
of dollars)
10
7.5
5
2.5
0
Da
Ra
te o
f in
tere
st,
i (
pe
rce
nt)
Amount of moneydemanded (billions
of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Dm
13 - 16Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
PreviousSlide
NextSlide
EndShow
+ =TransactionsDemand, Dt
AssetDemand, Da
Total demandfor money, Dm
0 50 100 150 200 250 300
Ra
te o
f in
tere
st,
i (
pe
rce
nt)
Amount of moneydemanded (billions
of dollars)
Dt
10
7.5
5
2.5
00 50 100 150 200 250 300
THE DEMAND FOR MONEY
Ra
te o
f in
tere
st,
i (
pe
rce
nt)
Amount of moneydemanded (billions
of dollars)
10
7.5
5
2.5
0
Da
Ra
te o
f in
tere
st,
i (
pe
rce
nt)
Amount of moneydemanded (billions
of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Sm
EquilibriumInterest Rate
ie
Ra
te o
f in
tere
st,
i (
pe
rce
nt)
Amount of moneydemanded (billions
of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Dm
ADD THEMONEY SUPPLY
TO FIND THEEQUILIBRIUM RATE
OF INTEREST
13 - 17Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
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Ra
te o
f in
tere
st,
i (p
erce
nt)
Amount of money demanded(billions of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Dm
ie
Sm
THE MONEY MARKET
Suppose the moneysupply is decreasedfrom $200 billion, Sm,
to $150 billion Sm1.
13 - 18Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
PreviousSlide
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EndShow
Ra
te o
f in
tere
st,
i (p
erce
nt)
Amount of money demanded(billions of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Dm
ie
Sm
A temporary shortageof money will requirethe sale of some assetsto meet the need.
Sm1
THE MONEY MARKET
13 - 19Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
PreviousSlide
NextSlide
EndShow
Ra
te o
f in
tere
st,
i (p
erce
nt)
Amount of money demanded(billions of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Dm
ie
Sm
THE MONEY MARKET
Suppose the moneysupply is increasedfrom $200 billion, Sm,
to $250 billion Sm2.
13 - 20Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
PreviousSlide
NextSlide
EndShow
Ra
te o
f in
tere
st,
i (p
erce
nt)
Amount of money demanded(billions of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Dm
ie
Sm Sm2
THE MONEY MARKET
A temporary surplusof money will requirethe purchase of someassets to meet the de-sired level of liquidity.
13 - 21Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
PreviousSlide
NextSlide
EndShow
Ra
te o
f in
tere
st,
i (p
erce
nt)
Amount of money demanded(billions of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Dm
ie
Sm Sm2
THE MONEY MARKET
A temporary surplusof money will requirethe purchase of someassets to meet the de-sired level of liquidity.
Bonds are assumedas a typical asset with
lower prices associatedwith higher
interest rates
13 - 22Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
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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
THE FEDERAL RESERVE AND THE BANKING SYSTEM
13 - 23Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
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THE FEDERAL RESERVE AND THE BANKING SYSTEM
Open MarketCommittee
AdvisoryCouncils
Board ofGovernors
12 FederalReserve Banks
CommercialBanks
Thrift Institutions(Savings & loan associations,
mutual savings banks, credit unions)
The Public(Households and
businesses)
13 - 24Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
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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
13 - 25Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
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FED Functions & the Money Supply Federal Reserve IndependenceRecent Developments
•Relative Decline of Banks and Thrifts
•Financial Services Industry•Consolidation Among Banks and Thrifts
•Globalization of Financial Markets
•Electronic Transactions
13 - 26Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
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FED Functions & the Money Supply Federal Reserve IndependenceRecent Developments
•Relative Decline of Banks and Thrifts
•Financial Services Industry•Consolidation Among Banks and Thrifts
•Globalization of Financial Markets
•Electronic Transactions
ChapterConclusions
ENDBACK
medium of exchangeunit of accountstore of valueM1, M2, M3token moneyFederal Reserve Notescheckable depositscommercial banksthrift institutionsnear-moniessavings accountmoney market deposit account
(MMDA)time deposits
money market mutual fund (MMMF)
legal tendertransactions demandasset demandtotal demand for moneymoney marketFederal Reserve SystemBoard of GovernorsFederal Open Market
Committee (FOMC)Federal Reserve Banksfinancial services industryelectronic transactions
Copyright McGraw-Hill/Irwin 2002
13 - 28Copyright McGraw-Hill/Irwin, 2002
Functions of Money
What Backs the Money Supply
Demand for Money
The Money Market
The Federal Reserve & the Banking System
FED Functions & the Money Supply
Key Terms
PreviousSlide
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How Banks and Thrifts Create Money
Chapter 14
Coming up next...