Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33CHAPTER 10 The Money Supply and the Federal Reserve System© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster1 of 31PowerPoint Lectures for Principles of Macroeconomics, 9eBy Karl E. Case, Ray C. Fair & Sharon M. Oster ; ;CHAPTER 10 The Money Supply and the Federal Reserve System© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster2 of 3110PART III THE CORE OF MACROECONOMIC THEORY© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and OsterThe Money Supplyand the FederalReserve SystemFernando & Yvonn QuijanoPrepared by:CHAPTER 10 The Money Supply and the Federal Reserve System© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster4 of 3111An Overview of MoneyWhat Is Money?Commodity and Fiat MoniesMeasuring the Supply of Money in theUnited StatesThe Private Banking SystemHow 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 MoneyLooking AheadCHAPTER OUTLINEThe Money Supplyand the FederalReserve System10PART III THE CORE OF MACROECONOMIC THEORYCHAPTER 10 The Money Supply and the Federal Reserve System© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster5 of 31An Overview of MoneyMoney is anything that is generally accepted as a medium of exchange.What Is Money?barter The direct exchange of goods and services for other goods and services.A Means of Payment, or Medium of Exchangemedium of exchange, or means of payment What sellers generally accept and buyers generally use to pay for goods and services.CHAPTER 10 The Money Supply and the Federal Reserve System© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster6 of 31An Overview of MoneyWhat Is Money?store of value An asset that can be used to transport purchasing power from one time period to another. A Store of Valueliquidity 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. unit of account A standard unit that provides a consistent way of quoting prices. A Unit of AccountCHAPTER 10 The Money Supply and the Federal Reserve System© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster7 of 31An Overview of MoneyCommodity and Fiat MoniesDolphin Teeth as CurrencyShrinking Dollar Meets Its Match In Dolphin TeethWall Street JournalCHAPTER 10 The Money Supply and the Federal Reserve System© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster8 of 31An Overview of MoneyCommodity and Fiat Moniescommodity 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.CHAPTER 10 The Money Supply and the Federal Reserve System© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster9 of 31An Overview of MoneyMeasuring the Supply of Money in the United StatesM1, or transactions money Money that can bedirectly used for transactions.M1: Transactions MoneyM1 ≡ currency held outside banks + demand deposits + traveler’s checks + other checkable depositsCHAPTER 10 The Money Supply and the Federal Reserve System© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster10 of 31An Overview of MoneyMeasuring the Supply of Money in the United Statesnear monies Close substitutes for transactions money, such as savings accounts and money market accounts. M2: Broad MoneyM2, or broad money M1 plus savings accounts, money market accounts, and other near monies. M2 ≡ M1 + Savings accounts + Money market accounts + Other near moniesCHAPTER 10 The Money Supply and the Federal Reserve System© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster11 of 31An Overview of MoneyMeasuring the Supply of Money in the United StatesThere are no rules for deciding what is money and what is not. This poses problems for economists and those in charge of economic policy.Beyond M2CHAPTER 10 The Money Supply and the Federal Reserve System© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster12 of 31An Overview of MoneyThe Private Banking Systemfinancial 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: Goldsmithsrun on a bank Occurs when many of those who have claims on a bank (deposits) present them at the same time.CHAPTER 10 The Money Supply and the Federal Reserve System© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster13 of 31How Banks Create MoneyThe Modern Banking SystemA Brief Review of AccountingAssets − Liabilities ≡ Net Worth,orAssets ≡ Liabilities + Net WorthFederal Reserve Bank (the Fed) The central bank of the United States.CHAPTER 10 The Money Supply and the Federal Reserve System© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster14 of 31How Banks Create MoneyThe Modern Banking SystemA Brief Review of AccountingThe balance sheet of a bank must always balance, so that the sum of assets (reserves and loans) equals