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The Money Supplyand the FederalReserve System
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CHAPTER OUTLINE
An Overview of Money What Is Money? Commodity and
Fiat Monies Measuring the Supply of Money in
the United States The Private Banking System How
Banks Create MoneyA Historical Perspective
Goldsmiths The Modern Banking System The Creation
of Money The Money Multiplier The Federal
Reserve System Functions of the Federal
ReserveThe Federal Reserve Balance Sheet How
the Federal Reserve Controls the Money SupplyThe
Required Reserve RatioThe Discount RateOpen
Market OperationsThe Supply Curve for
Money Looking Ahead
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• Terms and Concepts
• barter takas, trampa
• commodity monies mal para
• currency debasement paranin degerini düsürme
• discount rate reeskont orani, merkez bankasinin
  tasarruf bankalarina açtigi kredilere uyguladigi
  iskonto orani
• excess reserves rezerv fazlalari
• Federal Open Market Committee (FOMC) Federal
  Açik Piyasa Komitesi
• Federal Reserve System (the Fed) Federal Rezerv
  Sitem (Amerikan Merkez Bankasi)
• fiat, or token, money yasal veya itibari para
• financial intermediaries mali araci
• legal tender yasal ödeme-mübadele araci
• lender of last resort son ödünç verme (kredi)
  mercii (basvurulacak yer)
• liquidity property of money paranin akiskanlik
  (likidite) özelligi
• M1, or transactions money M1, islemlerde
  kullanilan para
• M2, or broad money M2, genis anlamda para (para
  ve benzerleri)
• medium of exchange, or means of payment
  degisim-mübadele araci veya ödeme araci

3

• Terms and Concepts
• money multiplier para çarpani
• moral suasion istek veya telkinler
• near moniespara benzerleri (para olmadigi halde,
  para yerine geçen aktif degerler)
• Open Market Desk Açik Piyasa Masasi
• open market operations açik piyasa islemleri
• required reserve ratio zorunlu (munzam) karsilik
  orani
• reserves rezervler (mevduat kuruluslarinin
  toplam mevduatlarindan kredi vermeyip kasalarinda
  veya merkez bankasinda tuttuklari pay)
• run on a bank bankaya akin etmek, mevduatin
  çekilmesi
• store of value deger biriktirme (tasarruf) araci
• unit of account hesap birimi
• M1 currency held outside banks demand
  deposits travelers checks other checkable
  deposits
• M2 M1savings accounts money market accounts
  other near monies
• Assets liabilities capital (or net worth)
• Excess reserves actual reserves - required
  reserves
• Money multiplier

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An Overview of Money
What Is Money?

• Money is anything that is generally accepted as a
  medium of exchange.
• Money is not income, and money is not wealth.
  Money is
• a means of payment,
• a store of value, and
• a unit of account.

A Means of Payment, or Medium of Exchange
barter The direct exchange of goods and services
for other goods and services. A barter system
requires a double coincidence of wants for trade
to take place. Money eliminates this problem.
medium of exchange, or means of payment What
sellers generally accept and buyers generally use
to pay for goods and services.
5
Which field of economic theory does not require
that we know anything about money? a. Microeconomi
cs. b. Macroeconomics. c. Neither microeconomic
nor macroeconomic theory requires that we know
anything about money. d. None of the above. Both
microeconomic and macroeconomic theory require
that we know quite a bit about money.
6
Which field of economic theory does not require
that we know anything about money? a. Microeconomi
cs. b. Macroeconomics. c. Neither microeconomic
nor macroeconomic theory requires that we know
anything about money. d. None of the above. Both
microeconomic and macroeconomic theory require
that we know quite a bit about money.
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An Overview of Money
What Is Money?
A Store of Value
store of value An asset that can be used to
transport purchasing power from one time period
to another.
Money is easily portable, and easily exchanged
for goods at all times. 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.
A Unit of Account
unit of account A standard unit that provides a
consistent way of quoting prices.
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Which of the following refers to the liquidity
property of money? a. The fact that money makes a
good medium of exchange. b. The fact that money
is portable and comes in convenient
denominations. c. The fact that money is readily
accepted and thus easily exchanged for
goods. d. All of the above.
9
Which of the following refers to the liquidity
property of money? a. The fact that money makes a
good medium of exchange. b. The fact that money
is portable and comes in convenient
denominations. c. The fact that money is readily
accepted and thus easily exchanged for
goods. d. All of the above.
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An Overview of Money
Commodity and Fiat Monies
Dolphin Teeth as Currency
Shrinking Dollar Meets Its Match In Dolphin
Teeth Wall Street Journal
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An Overview of Money
Commodity and Fiat Monies
commodity monies Items used as money that also
have intrinsic value in some other use.
fiat, or token, 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.
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An Overview of Money
Measuring the Supply of Money in the United States
M1 Transactions Money
M1, or transactions money Money that can
be directly used for transactions.
M1 currency held outside banks demand
deposits travelers checks other checkable
deposits
M1 is a stock measureit is measured at a point
in timeon a specific day.
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An Overview of Money
Measuring the Supply of Money in the United States
M2 Broad Money
near monies Close substitutes for transactions
money, such as savings accounts and money market
accounts.
M2, or broad money M1 plus savings accounts,
money market accounts, and other near monies.
M2 M1 Savings accounts Money market
accounts Other near monies
The main advantage of looking at M2 instead of M1
is that M2 is sometimes more stable.
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When you transfer 1,000 from your checking
account to your savings account, this transaction
will a. Decrease both M1 and M2. b. Decrease M1
and increase M2. c. M1 will remain the same and
M2 will increase. d. M2 will remain the same and
M1 will decrease.
15
When you transfer 1,000 from your checking
account to your savings account, this transaction
will a. Decrease both M1 and M2. b. Decrease M1
and increase M2. c. M1 will remain the same and
M2 will increase. d. M2 will remain the same and
M1 will decrease.
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An Overview of Money
Measuring the Supply of Money in the United States
Beyond M2
There are no rules for deciding what is money and
what is not. This poses problems for economists
and those in charge of economic policy.
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An Overview of Money
The Private Banking System
financial intermediaries Banks and other
institutions that act as a link between those who
have money to lend and those who want to borrow
money.
A Historical Perspective Goldsmiths
Goldsmiths functioned as warehouses where people
stored gold for safekeeping. Upon receiving the
gold, a goldsmith would issue a receipt to the
depositor. After a time, these receipts
themselves began to be traded for goods, and were
backed 100 percent by gold. Then, Goldsmiths
realized that they could lend out some of this
gold without any fear of running out. Now there
were more claims than there were ounces of gold.
run on a bank Occurs when many of those who
have claims on a bank (deposits) present them at
the same time.