UNIVERSAL COLLEGE OF ENGINEERING & TECHNOLOGY
Dec 27, 2015
MONEY SUPPLY
Currency•Token Money•Federal Reserve Notes•Little Intrinsic Value
Checkable Deposits•Commercial Banks•Thrift Institutions
Definition…
MONEY SUPPLY
= Plus...Near-moniesSavings Deposits
• Money Market Deposit Accounts (MMDAs)
Smaller Time DepositsMoney Market Mutual Funds
(MMMFs)
Currency (coins & paper money)
plus Checkable deposits
equals M1
M1 M2 M3
$1236
2003 Data(billions of dollars)
MONEY SUPPLY
M1 M2 M3
$1236
2003 Data(billions of dollars)
$5899
MONEY SUPPLY
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
M1 M2 M3
$1236
2003 Data(billions of dollars)
$5899
$8595
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
WHAT BACKS THE MONEY SUPPLY?
Money as DebtValue of Money• Acceptability• Legal Tender• Relative Scarcity
Money and Prices• Purchasing Power of Money• D = 1/Price Level
Inflation and Acceptability
WHAT BACKS THE MONEY SUPPLY?
So, What Backs the Money Supply?Stable Value!
through...• Appropriate Fiscal Policy• Intelligent Management of the
Money Supply – Monetary Policy
THE DEMAND FOR MONEY
Transactions Demand, Dt
varies directly with nominal GDP
Asset Demand, Da
varies inversely with the interest rateLiquidity Preference
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 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
(FOMC)• 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
FederalOpen Market
Committee
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•Discount Rate
• 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•Convergence of Services Provided by Financial Institutions
•Globalization of Financial Markets•Electronic Transactions