Money

1
Money Banking

• Chapter 14

2
Functions of Money

• Medium of exchange
• Usable for buying goods services
• Readily acceptable as payment
• Allows society to escape the complications of
  barter
• Unit of account society uses monetary units
  (dollars) as a yardstick for measuring the
  relative worth of products
• Store of value enables people to transfer
  purchasing power from the present to the
  futuremost liquid (spendable) of all assets

3
Components of the Money Supply

• M1
• M2
• Money is a stock of some item or group of items
  
• Societies have used many items as money

4
M1

• Consists of
• Currency coins paper money
• Token money
• Federal Reserve Notes
• Checkable deposits
• Institutions that offer checkable deposits
• Commercial banks
• Thrift institutions (SLs, credit unions, etc.)
  supplement commercial banks
• M1currency checkable deposits

5
M2

• Near monies certain highly liquid financial
  assets that do not function directly or fully as
  a medium of exchange but can be readily converted
  into M1.
• Three categories
• Savings deposits
• Small time deposits
• Money market mutual funds held by individuals
  (MMMF)
• M2M1savings depositsMMDAssmall time
  depositsMMMF held by individuals

6
MZM

• Reported by the Federal Reserve Bank of St. Louis
• Focuses exclusively on monetary balances that are
  immediately available, at zero cost, for
  household business transactions
• Economists make two adjustments to M2
• MZMM2-Small time deposits MMMFs held by
  businesses

7
What Backs the Money Supply?

• Money as debt
• Value of money
• Acceptability
• Legal tender
• Relative scarcity
• Money prices
• The purchasing power of the dollar (V1/P)
• Inflation acceptability
• Stabilizing moneys purchasing power

8
The Federal Reserve theBanking System

• Historical background
• Board of Governors (BOG)
• Central authority of the US money banking
  system.
• The 12 Federal Reserve Banks
• Serves as the nations central bank. These
  banks also serve as bankers banks. Our bank is
  in Chicago.
• FOMC (Federal Open Market Committee)
• Aids the BOG in conducting monetary policy and is
  made up of 12 individuals.
• Commercial Banks Thrifts
• There are about 7600 commercial banks and 11,400
  thrift institutions (mostly credit unions)

9
FED Cont.

• Functions the Money Supply
• Issuing currency (Federal Reserve Notes)
• Setting reserve requirements holding reserves
• Lending money to banks thrifts
• Discount rate
• Providing for check collection
• Acting as a fiscal agent
• Supervising banks
• Controlling the money supply (Most important)
• Federal Reserve Independence
• Protects the Fed from political pressures so that
  it could effectively manage the money supply
  maintain price stability

10
Recent Developments in Money Banking

• Relative decline of Banks Thrifts
• Consolidation among Banks Thrifts
• Convergence of Services Provided by Financial
  Institutions
• Globalization of Financial Markets
• Electronic Payments