macroeconomics ch 13

8/10/2019 Macroeconomics Ch 13

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Macroeconomics

Dr. Karim Kobeissi

Arts, Sciences and Technology University in Lebanon


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Chapter 13: Money, Banking, and The Federal Reserve System


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The Functions of Money

The three functions of money are:

1) Medium of exchange

2) Unit of account

3) Store of value


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The Money Supply

In economics, the money supply or money stock, is

the total amount of monetary assets available in an

economy at a specific time.


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The Money Supply (con)

Money supply data are recorded and published,

usually by the government or the central bank of

the country.

Public and private sector analysts have long

monitored changes in money supply because of its

effects on the price level, inflation, the exchange

rate and the business cycle.


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The Components of the Money Supply

Two definitions of money supply are:

1) M1: Cash and others assets that are highly liquid.

2) M2: A broader definition of money than M1, because

it also includes assets that are highly liquid but not

cash.


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Money Definition: M1

M1 money = Currency + Checkable Deposits

Currencyincludes coins and paper money.

All coins in circulation are token money.

Paper money known as Federal Reserve Notes.

C h e c k a bl e D e p o s i t s ( D e m a n d D e p o s i t s )

- All deposits in depository institutions that can be

withdrawn without prior notice (on demand); most

of these are non-interest bearing .


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Money Definition: M2

M2 = M1 + Near Money

Near Money: includes savings deposits (interest bearing non-

transaction accounts that can be drawn upon demand at

no costs), money market mutual funds and other time

deposits, which are less liquid and not as suitable as

exchange mediums but can be quickly converted into cash

or checking deposits.


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What Backs the Money Supply?

The U.S. money supply is guaranteed by

governments ability to keep the value of money

relatively stable.


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Value of Money

Money has value because of:

1) Its acceptability (the US$

is acceptable everywhere,which isnt the case of

the Lebanese Pound).

2) Legal tender designation.

3) Relative scarcity.

A 'Legal Tender' is any official

medium of payment

recognized by law that can

be used to repay a public or

private debt, or meet a

financial obligation. The

national currency is legal

tender in practically every

country. A creditor is

obligated to accept legal

tender toward repayment

of a debt.


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Money and Prices

The purchasing power of money is the amount of

goods and services a unit of money will buy.


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Money and Prices (con)The purchasing power of

the national currency

(e.g., US$) variesinversely with the pricelevel:

If the price level rises,the purchasing power

of the dollar falls, and

vice versa.

The price level is a certain averageof the prices of a broadly

defined group of commodities. Itis an index that measures thechange in price of goods in aneconomy over time and hencethe purchasing power of the

currency of the country.

In the U.S. the price level isrepresented by the CPI(Consumer Price Index) which

measures changes in the pricelevel of a market basket ofconsumer goods and servicespurchased by households.


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Money and Prices

When the government prints too much money,

the purchasing power of money declines.

Also, runaway inflation (very rapid inflation, which

is almost impossible to reduce) may significantly

reduce the purchasing power of the national

currency and may cause it to cease being used as

a medium of exchange (decrease money

acceptability).


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The Federal Reserve System & The Banking System

A key element of the U.S. banking system is the Federal

Reserve System (the Fed - the Central Bank of the United

States) which represent a system of 12 Federal Reserve

banks, each serving member commercial banks in its own

district.

The Fed, supervised by the Board of Governors , has broad

regulatory powers over the money supply and the credit

structure.


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The Federal Reserve System and The Banking System


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The Federal Reserve System and The Banking System (con)

Board of Governors

The seven-member group that supervises andcontrols the money and banking system of the

U.S..

The 12 Federal Reserve Banks

The 12 banks licensed by the U.S. government tocontrol the money supply and perform otherfunctions.


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The Federal Reserve System and The Banking System


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Fed Functions and Responsibilities

The Fed performs the following functions:

1) Issues currency

2) Sets reserve requirements and holds reserves

3) Lends money to banks and saving institutions

4) Provides the banking system with a means for

collecting checks

5) Acts as a fiscal agent for the Federal government

6) Supervises the operation of banks

7) Controls the money supply


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Fed Reserve Independence

The Federal Reserve is an independent agency

of the government.

This protects the Fed from political pressure so

that it could effectively control the money

supply and interest rates to foster price-level

stability.


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Depositing Reserves in a Federal Reserve Bank

All commercial banks and saving institutions thatprovide checkable deposits must by law keep

required reserves.

Required reservesare an amount of funds equal to

a specified percentage of the banks own deposit

liabilities.


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Depositing Reserves in a Federal Reserve Bank

The reserve ratio is the percentage of deposits that the

Federal Reserve requires a bank to keep on hand at aFederal Reserve bank.

Reserve Banks required reservesratio Banks checkable-deposit liabilities

For example, letsassume that Bank XYZ has $400 million in deposits. If

Bank XYZ is required to keep at least $20 million in an account at a

Federal Reserve bank (XYZ may not use that cash for lending or any

other purpose), then the Federal Reserves reserve ratio is 5%.

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macroeconomics ch 13

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