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1、10 MONEY AND PRICES IN THE LONG RUN129The Monetary System2Questions What is money？Whatre the functions of money?Where does money come from?Who creates money?How is money created?Is any problem in the course of money creation? 3Content The meaning of the money -the definition of money -the functions
2、of moneyThe federal reserve system -Fed and the money supply -banks and the money supplyProblems in controlling the money supply4THE MEANING OF MONEYMoney is the set of assets in an economy that people regularly use to buy goods and services from other people.Money has three functions in the economy
3、:Medium of exchangeUnit of accountStore of value5The Functions of MoneyMedium of ExchangeA medium of exchange is an item that buyers give to sellers when they want to purchase goods and services.A medium of exchange is anything that is readily acceptable as payment.6Unit of AccountA unit of account
4、is the yardstick people use to post prices and record debts.Store of ValueA store of value is an item that people can use to transfer purchasing power from the present to the future.LiquidityLiquidity is the ease with which an asset can be converted into the economys medium of exchange.7Discussion W
5、hich of the following are money in the U.S economy? Which are not? Explain your answers by discussing each of the three functions of money.A U.S. pennyA Mexican pesoA Picasso painting A plastic credit card8The Kinds of MoneyCommodity money takes the form of a commodity with intrinsic value.Examples:
6、 Gold, silver, cigarettes.Fiat money is used as money because of government decree.It does not have intrinsic value.Examples: Coins, currency, check deposits.9Money in the U.S. EconomyCurrency is the paper bills and coins in the hands of the public.Demand deposits are balances in bank accounts that
7、depositors can access on demand by writing a check.10Figure 1 Money in the U.S. EconomyCopyright2003 Southwestern/Thomson LearningBillionsof Dollars Currency($580 billion) Demand deposits Travelers checks Other checkable deposits ($599 billion) Everything in M1($1,179 billion) Savings deposits Small
8、 time deposits Money market mutual funds A few minor categories ($4,276 billion)0M1$1,179M2$5,45511CASE STUDY: Where Is All The Currency?In 2001 there was about $580 billion of U.S. currency outstanding.That is $2,734 in currency per adult.Who is holding all this currency?Currency held abroadCurrenc
9、y held by illegal entities12THE FEDERAL RESERVE SYSTEMThe Federal Reserve (Fed) serves as the nations central bank.It is designed to oversee the banking system.It regulates the quantity of money in the economy.The Fed was created in 1914 after a series of bank failures convinced Congress that the Un
10、ited States needed a central bank to ensure the health of the nations banking system.13THE FEDERAL RESERVE SYSTEMThe Structure of the Federal Reserve System:The primary elements in the Federal Reserve System are:1) The Board of Governors2) The Regional Federal Reserve Banks3) The Federal Open Market
11、 Committee14The Federal Reserve SystemCopyright2003 Southwestern/Thomson Learning15The Feds OrganizationThe Federal Reserve BanksThe New York Fed implements some of the Feds most important policy decisions.The Federal Open Market Committee (FOMC)Serves as the main policy-making organ of the Federal
12、Reserve System.Meets approximately every six weeks to review the economy.16The Feds OrganizationMonetary policy is conducted by the Federal Open Market Committee.Monetary policy is the setting of the money supply by policymakers in the central bankThe money supply refers to the quantity of money ava
13、ilable in the economy.17The Federal Open Market CommitteeThree Primary Functions of the FedRegulates banks to ensure they follow federal laws intended to promote safe and sound banking practices.Acts as a bankers bank, making loans to banks and as a lender of last resort.Conducts monetary policy by
14、controlling the money supply.18Open-Market OperationsThe money supply is the quantity of money available in the economy.The primary way in which the Fed changes the money supply is through open-market operations.The Fed purchases and sells U.S. government bonds.19BANKS AND THE MONEY SUPPLYBanks can
15、influence the quantity of demand deposits in the economy and the money supply.20BANKS AND THE MONEY SUPPLYReserves are deposits that banks have received but have not loaned out.In a fractional-reserve banking system, banks hold a fraction of the money deposited as reserves and lend out the rest.21Re
16、serve RatioThe reserve ratio is the fraction of deposits that banks hold as reserves.When a bank makes a loan from its reserves, the money supply increases.The money supply is affected by the amount deposited in banks and the amount that banks loan.Deposits into a bank are recorded as both assets an
17、d liabilities.The fraction of total deposits that a bank has to keep as reserves is called the reserve ratio.Loans become an asset to the bank.22Money Creation with Fractional-Reserve BankingThis T-Account shows a bank thataccepts deposits,keeps a portion as reserves, and lends out the rest. It assu
18、mes a reserve ratio of 10%.AssetsLiabilitiesFirst National BankReserves$10.00Loans$90.00Deposits$100.00Total Assets$100.00Total Liabilities$100.0023When one bank loans money, that money is generally deposited into another bank.This creates more deposits and more reserves to be lent out. When a bank
19、makes a loan from its reserves, the money supply increases.How much money is eventually created in this economy?24The Money MultiplierThe money multiplier is the amount of money the banking system generates with each dollar of reserves.25The Money Multiplier AssetsLiabilitiesFirst National BankReser
20、ves$10.00Loans$90.00Deposits$100.00Total Assets$100.00Total Liabilities$100.00AssetsLiabilitiesSecond National BankReserves$9.00Loans$81.00Deposits$90.00Total Assets$90.00Total Liabilities$90.00Money Supply = $190.00!26The Money MultiplierThe money multiplier is the reciprocal of the reserve ratio:M
21、 = 1/RWith a reserve requirement, R = 20% or 1/5,The multiplier is 5.27The Feds Tools of Monetary ControlThe Fed has three tools in its monetary toolbox:Open-market operationsChanging the reserve requirementChanging the discount rate28Open-Market OperationsThe Fed conducts open-market operations whe
22、n it buys government bonds from or sells government bonds to the public:When the Fed buys government bonds, the money supply increases.The money supply decreases when the Fed sells government bonds.29Reserve RequirementsThe Fed also influences the money supply with reserve requirements.Reserve requi
23、rements are regulations on the minimum amount of reserves that banks must hold against deposits.The reserve requirement is the amount (%) of a banks total reserves that may not be loaned out.Increasing the reserve requirement decreases the money supply. Decreasing the reserve requirement increases t
24、he money supply.30Changing the Discount RateThe discount rate is the interest rate the Fed charges banks for loans.Increasing the discount rate decreases the money supply. Decreasing the discount rate increases the money supply.31Problems in Controlling the Money SupplyThe Feds control of the money
25、supply is not precise.The Fed must wrestle with two problems that arise due to fractional-reserve banking.The Fed does not control the amount of money that households choose to hold as deposits in banks.The Fed does not control the amount of money that bankers choose to lend.32Application The econom
26、y contains 2000 $1 bills.If people hold all money as currency, what is the quantity of money?If people hold all money as demand deposits and banks maintain 100 percent reserves, what is the quantity of money?If people hold equal amounts of currency and demand deposits and banks maintain 100 percent
27、reserves, what is the quantity of money?33Application If people hold all money as demand deposits and banks maintain a reserve ratio of 10 percent, what is the quantity of money?If people hold equal amounts of currency and demand deposits and banks maintain a reserve ration of 10 percent, what is th
28、e quantity of money?34SummaryThe term money refers to assets that people regularly use to buy goods and services.Money serves three functions in an economy: as a medium of exchange, a unit of account, and a store of value.Commodity money is money that has intrinsic value. Fiat money is money without
29、 intrinsic value.The Federal Reserve, the central bank of the United States, regulates the U.S. monetary system. It controls the money supply through open-market operations or by changing reserve requirements or the discount rate. 35SummaryWhen banks loan out their deposits, they increase the quantity of money in the economy.Because the Fed cannot control the amount bankers choose to lend or the amount households choose to deposit in banks, the Feds control of the money supply is imperfect.36
