13 c h a p t e r examples of money cattle, cigarettes, shells, stones, gold, pepper, wampum, and...
TRANSCRIPT
13C H A P T E R
Examples of Money Cattle, cigarettes, shells,
stones, gold, pepper, wampum, and even beer as money
So what is Money?Money is anything that does
what money does
•Durability•Portability•Divisibility•Uniformity•Limited Supply•Acceptability
Six Characteristics of Money
FUNCTIONS OF MONEY• Medium of Exchange
•Money can be used for buying and selling goods and services •without money we have the problems of barter and the coincidence of wants•money allows for greater specialization and trade and productive efficiency
• Unit of Account•Prices are quoted in dollars and cents.
• Store of Value•money allows us to transfer purchasing power from present to future.•it is the most liquid (spendable) of all assets •a convenient way to store wealth.
Circular Flow Model of Capitalism Which of the arrows in the figure below represent money flow? Flow (1) is costs and income money flows and flow (4) represents consumer expenditures and business receipts money flows.
Why Monetary Side is Important
Barter is the direct exchange of goods and services for other goods and services.
Without money there would be barter.
BARTERa. Definition: the exchange of one good or service for another good or serviceb. Problems with barter:•coincidence of wants:
•a situation in which the good or services that one trader desires to obtain is the same as that which another desires to give up and an item that the second trader wishes to acquire is the same as that which the first trader desires to surrender •you have to find somebody who wants to trade the item that you want to get AND who also wants the item that you have that you want to trade
•With barter there will be less specialization because of the difficulty of overcoming the coincidence of wants.
•If you can't find someone to trade with, you will have to produce it yourself •Less specialization means less output and MORE SCARCITY
Barter requires the "double coincidence of wants." If someone wants something, he or she will have to find someone who wishes to part with that good and at the same time wishes to exchange the good for something that the first party wishes to part with.
REVIEW
What problems does barter entail?
With money as a medium of exchange, one knows the purchase price of the item to be purchased and its price relative to other items. Money is a very convenient common denominator, a common measure of value that is also used as a medium of exchange. Money also encourages specialization. Without money, workers and other resources could not be paid except in the output produced. All those who participated in the production of the good would have to collectively exchange it for all the goods and service desired by the resource owners.
Indicate the economic significance of money as a medium of exchange.
WHAT WHAT ABOUT ABOUT CREDIT CREDIT CARDS?CARDS?Credit cards are not money, but their use involves short-term loans; their convenience allows you to keep M1 balances low because you need less for daily purchases.
•Commodity money = objects that have value in themselves and that are also used as money (salt, cattle, gems, etc)•Representative Money = objects that have value because the holder can exchange them for something else of value•Fiat Money = valuable because the government says its valuable “legal tender”
Money’s Value
WHAT BACKS THE MONEY SUPPLY?
Money as DebtThe government's ability to keep its value stable provides the backing. People cannot convert paper money into a fixed amount of gold or any other precious commodityValue of Money
• Acceptability• Legal Tender - fiat money• Relative Scarcity
Money and Prices• Value of the Dollar• D = 1/Price Level
Inflation and Acceptability
MONEY SUPPLY
Currency•Token Money•Federal Reserve Notes•Intrinsic Value
Checkable Deposits•Commercial Banks•Thrift Institutions
Definition…
Review: If I take $10 from my wallet and put it into my checking account, what happens to M1?
MONEY SUPPLY
= Plus...Near-monies
Savings Deposits• Money Market Deposit Accounts
(MMDAs)Smaller Time DepositsMoney Market Mutual Funds (MMMFs)
Review: If I take $10 out of my wallet and put it into my savings account what happens to M1? what happens to M2?
The following are NOT part of M1:•currency in banks •currency and checkable deposits owned
by the government •currency and checkable deposits owned
by the Federal Reserve Banks
REMEMBER
MONEY SUPPLY
= Plus...Large Time Deposits
$100,000.00 or more
Illustrated…
Currency (coins & paper money)
plus Checkable deposits
equals M1
M1 M2 M3
$1101
2000 Data(billions of dollars)
MONEY SUPPLY
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
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
A. currency and checkable deposits of the government, Federal Reserve, and banks
B. income is not money income is a FLOW concept: you earn income over time (e.g.. $500 a week)
money is a STOCK concept: you have a given amount at a point in time ( e.g. $500 in your wallet and checking account right now)
when we talk about "money demand" we will mean a demand for more liquidity (more in my wallet) NOT an increase in my income
Can you get an increase in your income and have less money?
YES, if you put more of your income in the stock market and less in your checking account
WHAT BACKS THE MONEY SUPPLY?
So, What Backs the Money Supply?
Stable Value!through...
• Appropriate Fiscal Policy• Intelligent Management
of the Money Supply
THE DEMAND FOR MONEY
Transactions Demand, Dt
varies directly with nominal GDP
Asset Demand, Da
varies inversely with the interest rate
illustrated...
+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
+ =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
+ =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
+ =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
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.
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
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.
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.
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
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
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)
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
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
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
How Banks and Thrifts Create Money
Chapter 14
Coming up next...