Demand and supply money

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Demand and supply money

  1. 1. The Demand andThe Demand andSupply of MoneySupply of MoneySmi%$$ demandedDmi%1
  2. 2. Amount of money in circulation isAmount of money in circulation isconstantly changing. The amountconstantly changing. The amountdepends on how much money is desireddepends on how much money is desiredby individuals and businesses.by individuals and businesses.Supply of money automaticallySupply of money automaticallyexpands and contracts with the needsexpands and contracts with the needsof business.of business.Supply of Money:Supply of Money:
  3. 3. What is ourWhat is ourMoney Supply?Money Supply?Typically, what the FEDTypically, what the FEDcalls 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 Money1.1. Coin about 2-3% of total M1Coin about 2-3% of total M1 forforconvenience money; often called tokenconvenience money; often called tokenmoney because intrinsic value is less thanmoney because intrinsic value is less thanthe face value.the face value.2.2. Paper money is 46% of total M1Paper money is 46% of total M1in the form of Federal Reserve Notesin the form of Federal Reserve NotesNOTE: M1NOTE: M1 excludesexcludes currency held in thecurrency held in thebank vault or deposited in Federalbank vault or deposited in FederalReserve 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 for90% of transactions (offered by commercial90% of transactions (offered by commercialbanks, thrift institutions, and credit unions);banks, thrift institutions, and credit unions);calledcalled demand depositsdemand deposits, Automatic Transfer, Automatic TransferService and Share Draft Accounts.Service and Share Draft Accounts.NOTE: Currency and checkable depositsNOTE: Currency and checkable depositsowned by the US Treasury, the FED,owned by the US Treasury, the FED,commercial banks and other financialcommercial banks and other financialinstitutions 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 liquidfinancial assets that do not directlyfinancial assets that do not directlyfunction as medium of exchangefunction as medium of exchangebut can be easily converted intobut can be easily converted intocurrency 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 theamount of financial wealth held as nearamount of financial wealth held as nearmoney, the greater the willingness tomoney, the greater the willingness tospend out of current incomespend out of current income2)2) StabilityStability: easy conversion from near: easy conversion from nearmoney to M1 supply may force inflationmoney to M1 supply may force inflationto occurto occur3)3) Policy:Policy: complicates actions to becomplicates actions to betaken.taken.Importance of Near MoniesImportance of Near Monies
  9. 9. M2 MoneyM2 MoneyM1 plus:M1 plus:savings accounts, money marketsavings accounts, money marketmutual funds, money marketmutual funds, money marketdeposit accounts, and small-deposit accounts, and small-denomination time depositsdenomination time deposits
  10. 10. M2 plus:M2 plus:savings instruments greatersavings instruments greaterthan $100,000.than $100,000.M3 MoneyM3 MoneyWeWe do not includedo not include less liquidless liquidassets like Treasury Bills and USassets like Treasury Bills and USSavings 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 depositsM2M2M3M3++++MMOONNEEYYMMEEAASSUURREESS
  12. 12. Does gold or silverDoes gold or silverback up our money?back up our money?No, our money is notNo, our money is notbacked up by anythingbacked up by anything
  13. 13. …… Paper Money is the circulatingPaper Money is the circulatingdebt of the Federal Reserve Banks.debt of the Federal Reserve Banks.…… Checkable Deposits are the debtsCheckable Deposits are the debtsof commercial banks and thriftof commercial banks and thriftinstitutions.institutions.…… Paper Money has no intrinsicPaper Money has no intrinsicvalue; it cannot be redeemed in goldvalue; it cannot be redeemed in goldor other “valued” item.or other “valued” item.Money as DebtMoney as Debt
  14. 14. √√ Acceptability : confident money is tradableAcceptability : confident money is tradablefor goods and servicesfor goods and services√√ Legal tender: matter of law (creditor mustLegal tender: matter of law (creditor mustaccept or forfeit right to sue or chargeaccept or forfeit right to sue or chargeinterest) and government will accept money ininterest) and government will accept money inpayment of taxes.payment of taxes. Checks do not have thisChecks do not have thisstatus.status.√√ Relative scarcity: demand (utility related toRelative scarcity: demand (utility related toacceptance for goods and services) and supplyacceptance for goods and services) and supply(controlled by FED) relationship(controlled by FED) relationshipValue of MoneyValue of Money
  15. 15. √√ Purchasing power of money is thePurchasing power of money is thereal value.real value.√√ The amount a dollar will buyThe amount a dollar will buyvaries 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 levelMoney and PricesMoney and Prices
  16. 16. •Inflation is the result of a society’s spendingInflation is the result of a society’s spendingbeyond its capacity to produce.beyond its capacity to produce.•HH & BS are willing to accept currency andHH & BS are willing to accept currency andcheckable deposits as long as they know it cancheckable deposits as long as they know it canbe 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 purchasingpower will cause money to lose its function as apower will cause money to lose its function as amedium of exchange.medium of exchange.•Money will serve its function as a store ofMoney will serve its function as a store ofvalue as long as there is no unreasonable lossvalue as long as there is no unreasonable lossin value by storing it.in value by storing it.Inflation and Acceptability
  17. 17. √√ Major backing for money is theMajor backing for money is thegovernment’s ability to keep the value ofgovernment’s ability to keep the value ofmoney stable.money stable.√√ This means appropriate fiscal policy andThis means appropriate fiscal policy andwise management of the money supplywise management of the money supplythrough sound monetary policy.through sound monetary policy.√√ In US, a blend of legislation, governmentIn US, a blend of legislation, governmentpolicy, and social practice stops the unwisepolicy, and social practice stops the unwiseexpansion of the money supply which couldexpansion of the money supply which couldchange 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 andbusinesses 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 GDPDemand for MoneyDemand for MoneyTransaction demandTransaction demandi%$$ demandedDt
  19. 19. •• amount of money demanded by individuals andamount of money demanded by individuals andbusinesses to store wealthbusinesses to store wealth√√ Store of value function of moneyStore of value function of money√√ variesvaries inverselyinversely with GDPwith GDPDemand for MoneyDemand for MoneyAsset demandAsset demandi%$$ demandedDa
  20. 20. Combining the transactionCombining the transactiondemand and the asset demanddemand and the asset demandcreates the total demand forcreates the total demand formoney. This is the moneymoney. This is the moneymarket and determines themarket and determines theequilibrium interest rate.equilibrium interest rate.Demand for MoneyDemand for MoneyTotal Demand (DTotal Demand (Dmm))
  21. 21. i%i%11Money Demand CurveMoney Demand CurveMM22MM11DDi%i%22i%i%Q of MQ of M
  22. 22. i%$$ demandedDmi%1SmThe Money MarketThe Money MarketSupply ofSupply ofmoney is amoney is avertical linevertical linesince monetarysince monetaryauthoritiesauthorities(FED) and(FED) andfinancialfinancialinstitutionsinstitutionshave providedhave providedthe economythe economywith a certainwith a certainstock of money.stock of money.

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