Chapter Outline10The Money Supply andthe Federal Reserve SystemAn Overview of MoneyWhat Is Money?Commodity and Fiat MoniesMeasuring the Supply of Money in the United StatesHow Banks Create MoneyA Historical Perspective: GoldsmithsThe Modern Banking SystemThe Creation of MoneyThe Money MultiplierThe Federal Reserve SystemFunctions of the Federal ReserveThe Federal Reserve Balance SheetHow the Federal Reserve Controls the Money SupplyThe Required Reserve RatioThe Discount RateOpen Market OperationsThe Supply Curve for Money
Three Functions of MoneyWHAT IS MONEY?Money is anything that is generally accepted as a medium of exchange.(1) A Means of Payment, or Medium of Exchangebarter The direct exchange of goods and services for other goods and services.medium of exchange, or means of payment What sellers generally accept and buyers generally use to pay for goods and services.
Need Double Coincidence of Wants in a Barter EconomyCookFarmerMoverWriterCarpenterBarberwantsfurniturewantshaircutwantscornneedsto eatneeds tomovewants toread anovel
Three Functions of Money(2) A Store of Valuestore of value An asset that can be used to transport purchasing power from one time period to another.(3) A Unit of Accountunit of account A standard unit that provides a consistent way of quoting prices.liquidity property of money The property of money that makes it a good medium of exchange as well as a store of value: It is portable and readily accepted and thus easily exchanged for goods.
AN OVERVIEW OF MONEYcommodity monies Items used as money that also have intrinsic value in some other use.COMMODITY AND FIAT MONIESfiat, ortoken, money Items designated as money that are intrinsically worthless.legal tender Money that a government has required to be accepted in settlement of debts. currency debasement The decrease in the value of money that occurs when its supply is increased rapidly.
AN OVERVIEW OF MONEYMEASURING THE SUPPLY OF MONEY IN THE UNITED STATESM1, ortransactions money: Money that can be directly used for transactions. You can buy stuff with it!M1 ≡currency held outside banks + demand deposits + traveler’s checks + other checkable depositsDemand Deposits are checking accounts.
AN OVERVIEW OF MONEYM2: Broad Definition of Moneynear monies Close substitutes for transactions money, such as savings accounts and money market accounts.M2 ≡M1 + savings accounts + money market accounts + other near moniesM2, or broad money M1 plus savings accounts, money market accounts, and other near monies.
Monetary Aggregates8 of 36Monetary AggregatesValue as of Feb 2013($Billions)M1 = Currency1095.2+ Travelers Checks3.8+ Demand Deposits930.2+ Other Checkable Deposits462.7Total M12491.9M2 = M1+ Small Denomination Time Deposits 617.1+ savings deposit and MMDA6680.9+ Retail MMMF631.2Total M210421.1
Monetary AggregatesLink to Current Data
Question:•US population about 315 million people•Currency in circulation about $1100 billion, mostly $100 bills•$3,490 per person•Where is this money?