What is money How the Supply Value 11 18 2014 1 3 Functions of money 1 It serves as a medium of exchange Money simplifies and reduces the costs of transactions 2 Provides a means of storing value for future use It provides readily available purchasing power for dealing with an uncertain future 3 It is used as an accounting unit We use money to measure the exchange value and costs of goods services assets and resources How is the money supply measured 11 18 2014 2 What is included in M1 1 Currency in circulation 2 Checkable deposits demand interesting earning 3 Traveler s checks 3 What is included in M2 1 All items in M1 PLUS 2 Savings deposits 3 Time deposits of less than 100 000 all depository institutions 4 Money market mutual funds The Business of Banking 11 18 2014 4 The fractional reserve banking system limits the ability of banks to create new loans by permitting them to hold reserves of less than 100 against their deposits How Banks create money by extending loans11 18 2014 5 Does the expansion multiplier process work differently if all the new deposits are at the same bank instead of different banks The Federal Reserve System 11 18 2014 6 4 Tools the Fed uses to control money supply 1 Reserve requirements hasn t changed reserve requirements so don t count it 2 Open market operations most important The buying and selling of U S Gov t securities and other financial assets 3 Extend loans Lending out 4 Interest paid on excess and required reserves 7 4 Tools that expand money supply b c 1 Reducing reserve requirements create additional excess reserves and induce banks to extend more loans expanding the money supply 2 Purchasing additional U S securities and other assets increases money supply and expands reserves available to banks 3 Extending more loans increases bank reserves encouraging banks to make more loans and expand money supply 4 Reducing interest paid on excess reserves 8 4 Tools that reduce money supply 1 Raising reserve requirements 2 Selling U S securities and other assets 3 Extend fewer loans 4 Increase interest paid on excess 11 18 2014
View Full Document
Unlocking...