The Money Supply and the Federal Reserve System
Chapters 10 and 11 (24 and 25) form a conventional unit on money and banking. These
chapters provide the foundation for the discussion of modern monetary theory and for
the discussion and analysis of the monetarist and competing theories that follow.
Chapter 10 (25) introduces the student to the U.S. financial system. The chapter first
covers the nature, functions of money, and then discusses the Federal Reserve
System’s definition of the money supply. Next, the chapter addresses the question of
what “backs” money by looking at the value of money, money and prices, and the
management of the money supply. The demand for money is then covered, and it is
followed by an introduction and discussion of the money market.
1. Definitions of the money supply are arbitrary. This can be illustrated, because the
definition of M1 has changed over time as different instruments become acceptable as
2. Like me, most of you are fascinated by money. Consider the following trivia on the
Concept Illustration … U.S. paper currency
Trivia can be interesting! Did you know these facts about U.S. currency (Federal
The Bureau of Engraving and Printing, a Division of the United States Treasury, prints
Federal Reserve Notes in denominations of $1, $2, $5, $10, $20, $50, and $100. Since
1946, no $500, $1,000, $5,000, and $10,000 denominations have been printed.
Regional Federal Reserve Banks issue the currency and are identified by coding on the
face of each bill: A1 = Boston; B2 = New York; C3 = Philadelphia; D4 = Cleveland; E5 =
Richmond; F6 = Atlanta; G7 = Chicago; H8 = St. Louis; I9 = Minneapolis; J10 = Kansas
City; K11 = Dallas; L12 = San Francisco.