5. MONEY SUPPLY M2 = Plus... Large Time Deposits M3 Illustrated…
6. Currency (coins & paper money) plus Checkable deposits equals M1 M1 M2 M3 $1101 2000 Data (billions of dollars) MONEY SUPPLY
7. M1 M2 M3 $1101 2000 Data (billions of dollars) $4827 MONEY SUPPLY Currency (coins & paper money) plus Checkable deposits equals M1 plus Savings deposits, including MMDA’s plus Small time deposits plus Money market mutual fund (MMMF) balances equals M2
8. M1 M2 M3 $1101 2000 Data (billions of dollars) $4827 $6853 MONEY SUPPLY Currency (coins & paper money) plus Checkable deposits equals M1 plus Savings deposits, including MMDA’s plus Small time deposits plus Money market mutual fund (MMMF) balances equals M2 plus Large time deposits equals M3 Currency (coins & paper money) plus Checkable deposits equals M1 plus Savings deposits, including MMDA’s plus Small time deposits plus Money market mutual fund (MMMF) balances equals M2
12. THE DEMAND FOR MONEY Transactions Demand, D t varies directly with nominal GDP Asset Demand, D a varies inversely with the interest rate illustrated...
13. + Transactions Demand, D t THE DEMAND FOR MONEY Rate of interest, i (percent) Amount of money demanded (billions of dollars) D t 10 7.5 5 2.5 0 0 50 100 150 200 250 300
14. + = Transactions Demand, D t Asset Demand, D a THE DEMAND FOR MONEY Rate of interest, i (percent) Amount of money demanded (billions of dollars) D t 10 7.5 5 2.5 0 0 50 100 150 200 250 300 Rate of interest, i (percent) Amount of money demanded (billions of dollars) 10 7.5 5 2.5 0 D a 0 50 100 150 200 250 300
15. + = Transactions Demand, D t Asset Demand, D a Total demand for money, D m 0 50 100 150 200 250 300 THE DEMAND FOR MONEY Rate of interest, i (percent) Amount of money demanded (billions of dollars) D t 10 7.5 5 2.5 0 0 50 100 150 200 250 300 Rate of interest, i (percent) Amount of money demanded (billions of dollars) 10 7.5 5 2.5 0 D a Rate of interest, i (percent) Amount of money demanded (billions of dollars) 0 50 100 150 200 250 300 10 7.5 5 2.5 0 D m
16. + = Transactions Demand, D t Asset Demand, D a Total demand for money, D m 0 50 100 150 200 250 300 THE DEMAND FOR MONEY Rate of interest, i (percent) Amount of money demanded (billions of dollars) 0 50 100 150 200 250 300 10 7.5 5 2.5 0 S m Equilibrium Interest Rate i e Rate of interest, i (percent) Amount of money demanded (billions of dollars) D t 10 7.5 5 2.5 0 0 50 100 150 200 250 300 Rate of interest, i (percent) Amount of money demanded (billions of dollars) 10 7.5 5 2.5 0 D a Rate of interest, i (percent) Amount of money demanded (billions of dollars) 0 50 100 150 200 250 300 10 7.5 5 2.5 0 D m ADD THE MONEY SUPPLY TO FIND THE EQUILIBRIUM RATE OF INTEREST
17. Rate of interest, i (percent) Amount of money demanded (billions of dollars) 0 50 100 150 200 250 300 10 7.5 5 2.5 0 D m i e S m THE MONEY MARKET Suppose the money supply is decreased from $200 billion, S m, to $150 billion S m1 .
18. Rate of interest, i (percent) Amount of money demanded (billions of dollars) 0 50 100 150 200 250 300 10 7.5 5 2.5 0 D m i e S m A temporary shortage of money will require the sale of some assets to meet the need. S m1 THE MONEY MARKET
19. Rate of interest, i (percent) Amount of money demanded (billions of dollars) 0 50 100 150 200 250 300 10 7.5 5 2.5 0 D m i e S m THE MONEY MARKET Suppose the money supply is increased from $200 billion, S m, to $250 billion S m2 .
20. Rate of interest, i (percent) Amount of money demanded (billions of dollars) 0 50 100 150 200 250 300 10 7.5 5 2.5 0 D m i e S m S m2 THE MONEY MARKET A temporary surplus of money will require the purchase of some assets to meet the de- sired level of liquidity.
21. Rate of interest, i (percent) Amount of money demanded (billions of dollars) 0 50 100 150 200 250 300 10 7.5 5 2.5 0 D m i e S m S m2 THE MONEY MARKET A temporary surplus of money will require the purchase of some assets to meet the de- sired level of liquidity. Bonds are assumed as a typical asset with lower prices associated with higher interest rates
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23. THE FEDERAL RESERVE AND THE BANKING SYSTEM Open Market Committee Advisory Councils Board of Governors 12 Federal Reserve Banks Commercial Banks Thrift Institutions (Savings & loan associations, mutual savings banks, credit unions) The Public (Households and businesses)
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28. How Banks and Thrifts Create Money Chapter 14 Coming up next...
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