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Chapter 13 – Money & Banking

Chapter 13 – Money & Banking. I. Three Jobs of Money : A. Medium of Exchange B. Unit of Account (Standard of Value) C. Store of Value. II. Our Money Supply :

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Chapter 13 – Money & Banking

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  1. Chapter 13 – Money &Banking

  2. I.Three Jobs of Money: A. Medium of Exchange B. Unit of Account (Standard of Value) C. Store of Value

  3. II.Our Money Supply: A. M1:=Currency, demand deposits (checking accounts), traveler’s checks & other checkable deposits (NOW and Share Draft Accounts). B. M2: = M1 + savings accounts, small time deposits (CD’s) under $250,000, and non- institutional money market funds. C. M3: = M2 + large time deposits – over $250,000, institutional money market funds, short-term repurchase agreements, and other large non-liquid assets.. Are Credit Cards Money? No, a promise to pay.

  4. III. What Backs the Money Supply? - The U.S. governments ability to keep the value of money relatively stable. A. Money as Debt: Paper money and checkable deposits are promises to pay. B. Value of Money-Determined by: 1. Acceptability – our confidence. 2. Legal Tender –Government designates it as legal tender 3. Relative Scarcity – As managed by the government

  5. C. Money & Prices: 1. Purchasing Power of the dollar – varies inversely with prices. 2. Inflation & Acceptability – Runaway inflation may cause money not to be accepted as a medium of exchange. D. Stabilization of Money’s Value – Depends on the appropriate fiscal policy and intelligent management of the economy by the Federal Reserve.

  6. IV. The Demand for Money: A.Transactions Demand: 1. 1st Reasonfor holding money. Focuses on holding money as a medium of exchange. 2. The main determinant of transactions demand is the level of Nominal GDP. The larger GDP is, the higher the transactions demand. A direct relationship. 3. The demand for money here is independent of the interest rate.

  7. Transaction Demand Graph i% or Nominal Interest Rate MDt Quantity

  8. B. Asset Demand for Money: 1. The second reason for holding money is derived from people holding money as a store of value. 2. People can hold their money as an asset or invest it in financial assets such as stocks, bonds, etc. 3. The key here is an inverse relationship between money held as an asset and interest rates.

  9. Asset Demand For Money i% MDa Quantity

  10. C. Total Demand for Money: See graph for Money Market. Money Market Graph is combination of Transaction Demand for money and Asset Demand for money

  11. Money Market i% MS MD Quantity

  12. V. The Money Market: 1. Lower bond prices offered by the govt are associated with higher interest rates. 2. Higher bond prices offered by the govt are associated with lower interest rates. An inverse relationship.

  13. VI. The Federal Reserve System: A.Establishment: Set up in 1913 as nation’s central bank.

  14. Federal Reserve Building – Wash. D.C.

  15. B. Structure: 1. Chairman: Serves a 4 year term as part of a 14 year term as a member of the Board of Governors.

  16. Paul Volcker – 1979-87

  17. Allan Greespan 1987-2005

  18. World’s Strongest Man ?

  19. Ben Bernanke – 2005 to 2010

  20. Janet Yellen – 2010 to present

  21. 2. Board of Governors: Are 7 members appointed by the President and confirmed by the Senate. They serve 14 year terms

  22. 3. Federal Open Market Committee: 12 people. 8 are permanent members (7 members of the Board of Governors and the President of the NY Federal Reserve District Office) and the 4 others rotate from the 11 other District Banks.

  23. FOMC Meeting Room

  24. C. Federal Reserve’s Missions: 1. Financial Services – Bank for Banks & U.S. Govt

  25. 2. Monetary Policy 3. Supervisory & Regulatory Role: Supervise State Chartered member banks and implement consumer protection laws.

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