Functions of Money

What Backs the Money Supply

Demand for Money

The Money Market

13 CHAPTER

The Federal Reserve & the Banking System

Money and
FED Functions & the Money Supply

Key Terms

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Banking
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End
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Copyright McGraw-Hill/Irwin, 2002
 FUNCTIONS OF MONEY
Functions of Money

• Medium of Exchange
What Backs the Money Supply

Demand for Money

The Money Market

The Federal Reserve & the Banking System

FED Functions & the Money Supply

Key Terms
• Unit of Account

Previous
Slide
Next
Slide
• Store of Value
End
Show
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Copyright McGraw-Hill/Irwin, 2002
 MONEY SUPPLY
Functions of Money

What Backs the Money Supply

Definition…
Demand for Money

The Money Market

Currency
The Federal Reserve & the Banking System
•Token Money
FED Functions & the Money Supply

Key Terms
•Federal Reserve Notes
•Intrinsic Value
Checkable Deposits
Previous
Slide
Next
Slide
•Commercial Banks
End
Show
•Thrift Institutions
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Copyright McGraw-Hill/Irwin, 2002
 MONEY SUPPLY
Functions of Money

What Backs the Money Supply

Demand for Money

= Plus...
The Money Market Near-monies
Savings Deposits
The Federal Reserve & the Banking System

FED Functions & the Money Supply

Key Terms
• Money Market Deposit
Accounts (MMDAs)
Smaller Time Deposits
Previous
Slide
Next
Slide
Money Market Mutual Funds
End
Show
(MMMFs)
13 - 4
Copyright McGraw-Hill/Irwin, 2002
 MONEY SUPPLY
Functions of Money

What Backs the Money Supply

Demand for Money

= Plus...
The Money Market

Large Time Deposits

The Federal Reserve & the Banking System

FED Functions & the Money Supply

Key Terms

Illustrated…
Previous Next
Slide Slide
End
Show
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Copyright McGraw-Hill/Irwin, 2002
 MONEY SUPPLY
M1 M2 M3
Functions of Money Currency (coins & paper money)
plus Checkable deposits
What Backs the Money Supply

Demand for Money

equals M1
The Money Market

The Federal Reserve & the Banking System

$1101
FED Functions & the Money Supply

Key Terms

Previous Next
Slide Slide
End 2000 Data
Show (billions of dollars)
13 - 6
Copyright McGraw-Hill/Irwin, 2002
 MONEY SUPPLY
M1 M2 M3
Functions of Money Currency (coins & paper money)
plus Checkable deposits
What Backs the Money Supply

Demand for Money

equals M1
The Money Market

plus Savings deposits,

The Federal Reserve & the Banking System
$1101
FED Functions & the Money Supply
including MMDA’s
Key Terms
plus Small time deposits
plus Money market mutual
fund
(MMMF) balances
Previous
Slide
Next
Slide
equals M2 $4827
End 2000 Data
Show (billions of dollars)
13 - 7
Copyright McGraw-Hill/Irwin, 2002
 MONEY SUPPLY
M1 M2 M3
Functions of Money Currency (coins & paper money)
plus Checkable deposits
What Backs the Money Supply

Demand for Money

equals M1
The Money Market

plus Savings deposits,

The Federal Reserve & the Banking System
$1101
FED Functions & the Money Supply
including MMDA’s
Key Terms
plus Small time deposits
plus Money market mutual
fund
(MMMF) balances
Previous
Slide
Next
Slide
equals M2 $4827
2000 Data
End plus Large time deposits
Show (billions of dollars) $6853
13 - 8
equals M3
Copyright McGraw-Hill/Irwin, 2002
 WHAT ABOUT CREDIT CARDS?
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

Previous Next
Slide Slide
End
Show
13 - 9
Copyright McGraw-Hill/Irwin, 2002
 WHAT BACKS THE MONEY SUPPLY?

Functions of Money
Money as Debt
What Backs the Money SupplyValue of Money
• Acceptability
Demand for Money

The Money Market

• Legal Tender
The Federal Reserve & the Banking System

FED Functions & the Money Supply

Key Terms
• Relative Scarcity
Money and Prices
• Value of the Dollar
Previous
Slide
Next
Slide • D = 1/Price Level
End
Show
13 - 10
Inflation and Acceptability
Copyright McGraw-Hill/Irwin, 2002
 WHAT BACKS THE MONEY SUPPLY?

Functions of Money So, What Backs the

What Backs the Money Supply

Demand for Money

The Money Market

Money Supply?
Stable Value!
The Federal Reserve & the Banking System

FED Functions & the Money Supply

through...
Key Terms

• Appropriate Fiscal Policy

Previous Next • Intelligent Management
Slide Slide
End
Show
of the Money Supply
13 - 11
Copyright McGraw-Hill/Irwin, 2002
 THE DEMAND FOR MONEY

Transactions Demand, Dt
Functions of Money

What Backs the Money Supply

varies directly with nominal

Demand for Money

The Money Market

GDP
The Federal Reserve & the Banking System

FED Functions & the Money Supply

Key Terms

Asset Demand, Da
varies inversely with the
Previous Next
Slide
interest rate
illustrated.
Slide
End
Show
13 - 12
Copyright McGraw-Hill/Irwin, 2002
 THE DEMAND FOR MONEY
Functions of Money Transactions
Demand, Dt
What Backs the Money Supply +
Demand for Money
Rate of interest, i (percent)

The Money Market 10

The Federal Reserve & the

7.5Banking System

FED Functions & the Money Supply

5
Key Terms

2.5
Dt
0
0 50 100 150 200 250 300
Amount of money
demanded (billions
of dollars)
Previous Next
Slide Slide
End
Show
13 - 13
Copyright McGraw-Hill/Irwin, 2002
 THE DEMAND FOR MONEY
Functions of Money Transactions
Demand, Dt
What Backs the Money Supply + Asset
Demand, Da =
Demand for Money
Rate of interest, i (percent)

Rate of interest, i (percent)

The Money Market 10 10

The Federal Reserve & the

7.5Banking System 7.5

FED Functions & the Money Supply

5 5
Key Terms

2.5 2.5
Dt Da
0 0
0 50 100 150 200 250 300 0 50 100 150 200 250 300
Amount of money Amount of money
demanded (billions demanded (billions
of dollars) of dollars)
Previous Next
Slide Slide
End
Show
13 - 14
Copyright McGraw-Hill/Irwin, 2002
 THE DEMAND FOR MONEY
Functions of Money Transactions
Demand, Dt
What Backs the Money Supply + Asset
Demand, Da = Total demand
for money, Dm
Demand for Money
Rate of interest, i (percent)

Rate of interest, i (percent)

Rate of interest, i (percent)

The Money Market 10 10 10

The Federal Reserve & the

7.5Banking System 7.5 7.5

FED Functions & the Money Supply

5 5 5
Key Terms

2.5 2.5 2.5

Dm
Dt Da
0 0 0
0 50 100 150 200 250 300 0 50 100 150 200 250 300 0 50 100 150 200 250 300
Amount of money Amount of money Amount of money
demanded (billions demanded (billions demanded (billions
of dollars) of dollars) of dollars)
Previous Next
Slide Slide
End
Show
13 - 15
Copyright McGraw-Hill/Irwin, 2002
 THE DEMAND FOR MONEY
Functions of Money Transactions
Demand, Dt
What Backs the Money Supply + Asset
Demand, Da = Total demand
for money, Dm
Demand for Money ADD THE
MONEY SUPPLY Sm
Rate of interest, i (percent)

Rate of interest, i (percent)

Rate of interest, i (percent)

The Money Market 10 10 10

The Federal Reserve & the Banking System

FED Functions & the Money Supply

TO FIND THE 7.5 7.5 7.5

Key Terms EQUILIBRIUM RATE 5 5 5 ie

D
OF INTEREST 2.5 2.5 2.5
Dm
t Da
0 0 0
0 50 100 150 200 250 300 0 50 100 150 200 250 300 0 50 100 150 200 250 300
Amount of money Amount of money Amount of money
demanded (billions demanded (billions demanded (billions
of dollars) of dollars) of dollars)
Previous Next
Slide Slide
Equilibrium
End
Show Interest Rate
13 - 16
Copyright McGraw-Hill/Irwin, 2002
 THE MONEY MARKET
Functions of Money

What Backs the Money Supply

Sm

Rate of interest, i (percent)

Demand for Money 10 Suppose the money
The Money Market supply is decreased
7.5System
The Federal Reserve & the Banking from $200 billion, Sm,
FED Functions & the Money Supply to $150 billion Sm1 .
Key Terms 5 ie

2.5 Dm

0
0 50 100 150 200 250 300
Previous Next Amount of money demanded
Slide Slide
(billions of dollars)
End
Show
13 - 17
Copyright McGraw-Hill/Irwin, 2002
 THE MONEY MARKET
Functions of Money

What Backs the Money Supply

Sm1 Sm

Rate of interest, i (percent)

10
Demand for Money A temporary shortage
The Money Market of money will require
7.5System
The Federal Reserve & the Banking the sale of some assets
FED Functions & the Money Supply to meet the need.
Key Terms 5 ie

2.5 Dm

0
0 50 100 150 200 250 300
Previous Next Amount of money demanded
Slide Slide
(billions of dollars)
End
Show
13 - 18
Copyright McGraw-Hill/Irwin, 2002
 THE MONEY MARKET
Functions of Money

What Backs the Money Supply

Sm

Rate of interest, i (percent)

Demand for Money 10 Suppose the money
The Money Market supply is increased
7.5System
The Federal Reserve & the Banking from $200 billion, Sm,
FED Functions & the Money Supply to $250 billion Sm2 .
Key Terms 5 ie

2.5 Dm

0
0 50 100 150 200 250 300
Previous Next Amount of money demanded
Slide Slide
(billions of dollars)
End
Show
13 - 19
Copyright McGraw-Hill/Irwin, 2002
 THE MONEY MARKET
Functions of Money

What Backs the Money Supply

Sm Sm2

Rate of interest, i (percent)

Demand for Money 10 A temporary surplus
The Money Market of money will require
7.5System
The Federal Reserve & the Banking the purchase of some
FED Functions & the Money Supply
assets to meet the de-
Key Terms 5 ie sired level of liquidity.

2.5 Dm

0
0 50 100 150 200 250 300
Previous Next Amount of money demanded
Slide Slide
(billions of dollars)
End
Show
13 - 20
Copyright McGraw-Hill/Irwin, 2002
 THE MONEY MARKET
Functions of Money

What Backs the Money Supply

Sm Sm2

Rate of interest, i (percent)

Demand for Money 10
A temporary surplus
The Money Market
Bonds are assumed
of money will require
7.5System as a typical asset
The Federal Reserve & the Banking thewith
purchase of some
FED Functions & the Money Supply
assets to meet the de-
lower prices associated
Key Terms i sired level of liquidity.
5 with higher
e
interest rates
2.5 Dm

0
0 50 100 150 200 250 300
Previous Next Amount of money demanded
Slide Slide
(billions of dollars)
End
Show
13 - 21
Copyright McGraw-Hill/Irwin, 2002
 THE FEDERAL RESERVE AND
THE BANKING SYSTEM
Centralization and Public Control
Functions of Money

What Backs the Money Supply

Demand for Money • Board of Governors

• Assistance & Advice
The Money Market

The Federal Reserve & the Banking System

• Federal Open Market Committee

FED Functions & the Money Supply

Key Terms
• Three Advisory Councils
• The 12 Federal Reserve Banks
• Central Bank Role
• Quasi-Public Banks
Previous Next
Slide Slide • Banker’s Banks
End
Show • Commercial Banks & Thrifts
13 - 22
Copyright McGraw-Hill/Irwin, 2002
 THE FEDERAL RESERVE AND
THE BANKING SYSTEM
Functions of Money

What Backs the Money Supply Open Market Board of Advisory

Demand for Money Committee Governors Councils
The Money Market
12 Federal
The Federal Reserve & the Banking System

FED Functions & the Money SupplyReserve Banks

Key Terms

Commercial Thrift Institutions

(Savings & loan associations,
Banks mutual savings banks, credit unions)

Previous Next
Slide Slide The Public
(Households and
End businesses)
Show
13 - 23
Copyright McGraw-Hill/Irwin, 2002
 FED Functions & the Money Supply
Functions of Money
• Issuing Currency
• Setting Reserve Requirements
What Backs the Money Supply

Demand for Money

The Money Market & Holding Reserves

• Lending Money to Banks &
The Federal Reserve & the Banking System

FED Functions & the Money Supply

Key Terms
Thrifts
• Providing for Check Collection
• Acting as Fiscal Agent
Previous
Slide
Next
Slide
• Supervising Banks
End
Show • Controlling the Money Supply
13 - 24
Copyright McGraw-Hill/Irwin, 2002
 FED Functions & the Money Supply
Federal Reserve Independence
Functions of Money

Recent Developments
What Backs the Money Supply

Demand for Money

The Money Market

• Relative Decline of Banks and
Thrifts
The Federal Reserve & the Banking System

FED Functions & the Money Supply

Key Terms • Financial Services Industry

• Consolidation Among Banks and
Thrifts
• Globalization of Financial
Previous Next
Slide Slide Markets
End
Show
13 - 25
• Electronic Transactions
Copyright McGraw-Hill/Irwin, 2002
 FED Functions & the Money Supply
Federal Reserve Independence
Functions of Money

Recent Developments
What Backs the Money Supply

Demand for Money

The Money Market

• Relative Decline of Banks and
Chapter
Thrifts
The Federal Reserve & the Banking System

FED Functions & the Money Supply

• Financial Services Industry
Conclusions
Key Terms

• Consolidation Among Banks and

Thrifts
• Globalization of Financial
Previous Next
Slide Slide Markets
End
Show
13 - 26
• Electronic Transactions
Copyright McGraw-Hill/Irwin, 2002
medium of exchange money market mutual fund (MM
unit of account legal tender
store of value transactions demand
M1, M2, M3 asset demand
token money total demand for money
Federal Reserve Notes money market
checkable deposits Federal Reserve System
commercial banks Board of Governors
thrift institutions Federal Open Market Committe
near-monies Federal Reserve Banks
savings account financial services industry
money market deposit account (MMDA)
electronic transactions
time deposits

Copyright McGraw-Hill/Irwin 2002 BACK END

 Coming up next...
Functions of Money

What Backs the Money Supply

How Banks and
Demand for Money

The Money Market

Thrifts Create Money
The Federal Reserve & the Banking System

FED Functions & the Money Supply

Key Terms

Previous Next

Chapter 14
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End
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Copyright McGraw-Hill/Irwin, 2002