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Demand and supply money

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Demand for money
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Demand and supply money

  1. 1. The Demand andThe Demand and Supply of MoneySupply of Money Smi% $$ demanded Dm i%1
  2. 2. Amount of money in circulation isAmount of money in circulation is constantly changing. The amountconstantly changing. The amount depends on how much money is desireddepends on how much money is desired by individuals and businesses.by individuals and businesses. Supply of money automaticallySupply of money automatically expands and contracts with the needsexpands and contracts with the needs of business.of business. Supply of Money:Supply of Money:
  3. 3. What is ourWhat is our Money Supply?Money Supply? Typically, what the FEDTypically, what the FED calls M1 moneycalls M1 money
  4. 4. M1 MoneyM1 Money • CurrencyCurrency (held outside of banks)(held outside of banks) • Demand DepositsDemand Deposits • Traveler’s checksTraveler’s checks • Other checkable depositsOther checkable deposits – Money Market FundsMoney Market Funds
  5. 5. M1 MoneyM1 Money 1.1. Coin about 2-3% of total M1Coin about 2-3% of total M1 forfor convenience money; often called tokenconvenience money; often called token money because intrinsic value is less thanmoney because intrinsic value is less than the face value.the face value. 2.2. Paper money is 46% of total M1Paper money is 46% of total M1 in the form of Federal Reserve Notesin the form of Federal Reserve Notes NOTE: M1NOTE: M1 excludesexcludes currency held in thecurrency held in the bank vault or deposited in Federalbank vault or deposited in Federal Reserve Banks or held by US TreasuryReserve Banks or held by US Treasury √√ CurrencyCurrency
  6. 6. Checks are 52% of total M1Checks are 52% of total M1, used for, used for 90% of transactions (offered by commercial90% of transactions (offered by commercial banks, thrift institutions, and credit unions);banks, thrift institutions, and credit unions); calledcalled demand depositsdemand deposits, Automatic Transfer, Automatic Transfer Service and Share Draft Accounts.Service and Share Draft Accounts. NOTE: Currency and checkable depositsNOTE: Currency and checkable deposits owned by the US Treasury, the FED,owned by the US Treasury, the FED, commercial banks and other financialcommercial banks and other financial institutions are not counted as M1.institutions are not counted as M1. M1 MoneyM1 Money √√ Checkable DepositsCheckable Deposits
  7. 7. Near Monies…Near Monies… highly liquidhighly liquid financial assets that do not directlyfinancial assets that do not directly function as medium of exchangefunction as medium of exchange but can be easily converted intobut can be easily converted into currency or checkable deposits.currency or checkable deposits. M2 and M3 Money SupplyM2 and M3 Money Supply
  8. 8. 1)1) Spending habitsSpending habits: the greater the: the greater the amount of financial wealth held as nearamount of financial wealth held as near money, the greater the willingness tomoney, the greater the willingness to spend out of current incomespend out of current income 2)2) StabilityStability: easy conversion from near: easy conversion from near money to M1 supply may force inflationmoney to M1 supply may force inflation to occurto occur 3)3) Policy:Policy: complicates actions to becomplicates actions to be taken.taken. Importance of Near MoniesImportance of Near Monies
  9. 9. M2 MoneyM2 Money M1 plus:M1 plus: savings accounts, money marketsavings accounts, money market mutual funds, money marketmutual funds, money market deposit accounts, and small-deposit accounts, and small- denomination time depositsdenomination time deposits
  10. 10. M2 plus:M2 plus: savings instruments greatersavings instruments greater than $100,000.than $100,000. M3 MoneyM3 Money WeWe do not includedo not include less liquidless liquid assets like Treasury Bills and USassets like Treasury Bills and US Savings Bonds.Savings Bonds.
  11. 11. MIMI • Checkable depositsCheckable deposits • Travelers checksTravelers checks • CurrencyCurrency • Money market accountsMoney market accounts • Savings depositsSavings deposits • Small time depositsSmall time deposits • Large time depositsLarge time deposits M2M2 M3M3 ++ ++ MM OO NN EE YY MM EE AA SS UU RR EE SS
  12. 12. Does gold or silverDoes gold or silver back up our money?back up our money? No, our money is notNo, our money is not backed up by anythingbacked up by anything
  13. 13. …… Paper Money is the circulatingPaper Money is the circulating debt of the Federal Reserve Banks.debt of the Federal Reserve Banks. …… Checkable Deposits are the debtsCheckable Deposits are the debts of commercial banks and thriftof commercial banks and thrift institutions.institutions. …… Paper Money has no intrinsicPaper Money has no intrinsic value; it cannot be redeemed in goldvalue; it cannot be redeemed in gold or other “valued” item.or other “valued” item. Money as DebtMoney as Debt
  14. 14. √√ Acceptability : confident money is tradableAcceptability : confident money is tradable for goods and servicesfor goods and services √√ Legal tender: matter of law (creditor mustLegal tender: matter of law (creditor must accept or forfeit right to sue or chargeaccept or forfeit right to sue or charge interest) and government will accept money ininterest) and government will accept money in payment of taxes.payment of taxes. Checks do not have thisChecks do not have this status.status. √√ Relative scarcity: demand (utility related toRelative scarcity: demand (utility related to acceptance for goods and services) and supplyacceptance for goods and services) and supply (controlled by FED) relationship(controlled by FED) relationship Value of MoneyValue of Money
  15. 15. √√ Purchasing power of money is thePurchasing power of money is the real value.real value. √√ The amount a dollar will buyThe amount a dollar will buy varies inversely with the price level.varies inversely with the price level. D = 1/PD = 1/P D=Value of the $D=Value of the $ P= Price levelP= Price level Money and PricesMoney and Prices
  16. 16. •Inflation is the result of a society’s spendingInflation is the result of a society’s spending beyond its capacity to produce.beyond its capacity to produce. •HH & BS are willing to accept currency andHH & BS are willing to accept currency and checkable deposits as long as they know it cancheckable deposits as long as they know it can be spent without a loss of purchasing power.be spent without a loss of purchasing power. •In inflation… the rapid loss of purchasingIn inflation… the rapid loss of purchasing power will cause money to lose its function as apower will cause money to lose its function as a medium of exchange.medium of exchange. •Money will serve its function as a store ofMoney will serve its function as a store of value as long as there is no unreasonable lossvalue as long as there is no unreasonable loss in value by storing it.in value by storing it. Inflation and Acceptability
  17. 17. √√ Major backing for money is theMajor backing for money is the government’s ability to keep the value ofgovernment’s ability to keep the value of money stable.money stable. √√ This means appropriate fiscal policy andThis means appropriate fiscal policy and wise management of the money supplywise management of the money supply through sound monetary policy.through sound monetary policy. √√ In US, a blend of legislation, governmentIn US, a blend of legislation, government policy, and social practice stops the unwisepolicy, and social practice stops the unwise expansion of the money supply which couldexpansion of the money supply which could change money’s value in exchange.change money’s value in exchange. Stabilization of Money’s ValueStabilization of Money’s Value
  18. 18. •• amount of money demanded by individuals andamount of money demanded by individuals and businesses to buy and sell goods and servicesbusinesses to buy and sell goods and services √√ Medium of exchange function of moneyMedium of exchange function of money √√ variesvaries directlydirectly with GDPwith GDP Demand for MoneyDemand for Money Transaction demandTransaction demand i% $$ demanded Dt
  19. 19. •• amount of money demanded by individuals andamount of money demanded by individuals and businesses to store wealthbusinesses to store wealth √√ Store of value function of moneyStore of value function of money √√ variesvaries inverselyinversely with GDPwith GDP Demand for MoneyDemand for Money Asset demandAsset demand i% $$ demanded Da
  20. 20. Combining the transactionCombining the transaction demand and the asset demanddemand and the asset demand creates the total demand forcreates the total demand for money. This is the moneymoney. This is the money market and determines themarket and determines the equilibrium interest rate.equilibrium interest rate. Demand for MoneyDemand for Money Total Demand (DTotal Demand (Dmm))
  21. 21. i%i%11 Money Demand CurveMoney Demand Curve MM22MM11 DD i%i%22 i%i% Q of MQ of M
  22. 22. i% $$ demanded Dm i%1 Sm The Money MarketThe Money Market Supply ofSupply of money is amoney is a vertical linevertical line since monetarysince monetary authoritiesauthorities (FED) and(FED) and financialfinancial institutionsinstitutions have providedhave provided the economythe economy with a certainwith a certain stock of money.stock of money.

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