Transcript the Money Supply?

31
13
Money, Banking, and Financial
Institutions
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Functions of Money
• Medium of exchange
• Used to buy/sell goods
• Unit of account
• Goods are valued in dollars
• Store of value
• A place to store wealth.
LO1
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Money Definition M1
• M1
• Currency
• Checkable deposits (demand deposits)
• Institutions offering checkable deposits
• Commercial banks
• Savings and loan associations
• Mutual savings banks
• Credit unions
LO1
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Money Definition M2
• M2
• M1 plus near-monies
• Savings deposits including money
market deposit accounts (MMDA)
• Small-denominated time deposits
• Money market mutual funds (MMMF)
• What makes these different from M1?
LO1
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Money Definitions
January 2010
Source: Federal Reserve System
LO1
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What “Backs” the Money Supply?
• Guaranteed by government’s ability to
•
•
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keep value stable
Money as debt
Why is money valuable?
• Acceptability
• Legal tender – “fiat money:” money
because the govt. says its money..
• Relative scarcity
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The Demand for Money
• Transactions Demand – Dt
• Amount of money needed for purchases, etc.
• Main determinant is nominal GDP.
• Why?
• Asset Demand – Da
• Amount of wealth people want to hold as
money (instead of bonds, stocks, whatever).
• It’s main determinant is the interest rate.
LO3
31-8
The Demand for Money
• Total Demand for Money - Dm
• Is the sum of Dt and Da
• Change in nominal GDP will shift the total
money demand curve.
• Change in interest rate will cause a
movement along the curve.
LO3
31-9
Rate of interest, i percent
Demand for Money
(a)
Transactions
demand for
money, Dt
(b)
Asset
demand for
money, Da
10
Sm
7.5
=5
+
5
2.5
Dt
0
50
100
Da
150
200
Amount of money
demanded
(billions of dollars)
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(c)
Total
demand for
money, Dm
and supply
50
100
150
200
Amount of money
demanded
(billions of dollars)
Dm
50
100
150
200
250
300
Amount of money
demanded and supplied
(billions of dollars)
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Interest Rates
• Equilibrium interest rate
• Changes with shifts in money supply
•
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and money demand
Interest rates and bond prices
• Inversely related
• Bond pays fixed annual interest
payment
• Lower bond price will raise the
interest rate
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Federal Reserve - Banking System
• Board of Governors
• 12 Federal Reserve Banks
• Serve as the central bank
• Quasi-public banks
• Banker’s bank
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Federal Reserve – Banking System
The 12 Federal Reserve Banks
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Federal Reserve Functions
• Issue currency
• Set reserve requirements
• Lend money to banks
• Collect checks
• Act as a fiscal agent for U.S.
•
•
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government
Supervise banks
Control the money supply
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Federal Reserve Independence
• Established by Congress as an
•
•
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independent agency
Protects the Fed from political
pressures
Enables the Fed to take actions to
increase interest rates in order to
stem inflation as needed
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