Money Supply and Money Supply and other notions about other notions about

Money!Money!

Amount of money in circulation is Amount of money in circulation is constantly changing. The amount constantly changing. The amount depends on how much money is desired depends on how much money is desired by individuals and businesses. by individuals and businesses.

Supply of money automatically Supply of money automatically expands and contracts with the needs expands and contracts with the needs of business. of business.

Supply of Money:Supply of Money:

What is ourWhat is ourMoney Supply?Money Supply?

What is ourWhat is ourMoney Supply?Money Supply?

Typically, what the FED Typically, what the FED calls M1 moneycalls M1 money

M1 MoneyM1 MoneyM1 MoneyM1 Money

• Currency Currency (held outside of banks)(held outside of banks)

• Demand DepositsDemand Deposits

• TravelerTraveler’’s checkss checks

• Other checkable depositsOther checkable deposits

– Money Market FundsMoney Market Funds

M1 MoneyM1 MoneyM1 MoneyM1 Money1. 1. Coin about 2-3% of total M1Coin about 2-3% of total M1 for for

convenience money; often called token convenience money; often called token money because intrinsic value is less than money because intrinsic value is less than the face value.the face value.

2. 2. Paper money is 51% of total M1Paper money is 51% of total M1 in the form of Federal Reserve Notesin the form of Federal Reserve Notes (Jan (Jan 2010)2010)

NOTE: M1 NOTE: M1 excludes excludes currency held in the currency held in the bank vault or deposited in Federal bank vault or deposited in Federal Reserve Banks or held by US TreasuryReserve Banks or held by US Treasury

√ √ CurrencyCurrency

• Checks are 48% of total M1Checks are 48% of total M1, used for 90% , used for 90% of transactions (of transactions (offered by commercial banks, offered by commercial banks,

thrift institutions, and credit unionsthrift institutions, and credit unions); called ); called demand depositsdemand deposits, Automatic Transfer , Automatic Transfer Service and Share Draft Accounts. Service and Share Draft Accounts.

NOTE: Currency and checkable deposits NOTE: Currency and checkable deposits owned by the US Treasury, the FED, owned by the US Treasury, the FED, commercial banks and other financial commercial banks and other financial

institutions are not counted as M1.institutions are not counted as M1.

M1 MoneyM1 MoneyM1 MoneyM1 Money √ √ Checkable DepositsCheckable Deposits

Near Monies…Near Monies… highly liquid highly liquid

financial assets that do not directly financial assets that do not directly

function as medium of exchange function as medium of exchange

but can be easily converted into but can be easily converted into

currency or checkable deposits. currency or checkable deposits.

M2 Money SupplyM2 Money SupplyM2 Money SupplyM2 Money Supply

1)1) Spending habits Spending habits: the greater the : the greater the amount of financial wealth held as near amount of financial wealth held as near money, the greater the willingness to money, the greater the willingness to spend out of current incomespend out of current income2) 2) StabilityStability: easy conversion from near : easy conversion from near money to M1 supply may force inflation money to M1 supply may force inflation to occurto occur3) 3) Policy:Policy: complicates actions to be complicates actions to be taken.taken.

Importance of Near MoniesImportance of Near MoniesImportance of Near MoniesImportance of Near Monies

M2 MoneyM2 MoneyM2 MoneyM2 Money

M1 plus:M1 plus:

savings accounts, money market savings accounts, money market

mutual funds, money market mutual funds, money market

deposit accounts, and small-deposit accounts, and small-

denomination time depositsdenomination time deposits

Money DefinedMoney DefinedM1 M251%

48%

M120%

Savings DepositsIncluding Money Market

Deposit Accounts (MMDA)

Small Time Deposits

Money Market MutualFunds Held By Individuals

(MMMF)

Currency

Checkable Deposits

15%

11%

54%

$1,676Billion

$8,463Billion

January 2010

Totals

++

+

+

+

1% Trav Check

Does gold or silver Does gold or silver back up our money?back up our money?Does gold or silver Does gold or silver

back up our money?back up our money?

No, our money is not No, our money is not backed up by anythingbacked up by anything

… … Paper Money is the circulating Paper Money is the circulating

debt of the Federal Reserve Banks. debt of the Federal Reserve Banks.

… … Checkable Deposits are the debts Checkable Deposits are the debts

of commercial banks and thrift of commercial banks and thrift

institutions. institutions.

… … Paper Money has no intrinsic Paper Money has no intrinsic

value; it cannot be redeemed in gold value; it cannot be redeemed in gold

or other or other ““valuedvalued”” item. item.

Money as DebtMoney as DebtMoney as DebtMoney as Debt

Acceptability : confident money is tradable Acceptability : confident money is tradable for goods and servicesfor goods and services

Legal tender: matter of law (creditor must Legal tender: matter of law (creditor must accept or forfeit right to sue or charge accept or forfeit right to sue or charge interest) and government will accept money interest) and government will accept money in payment of taxes.in payment of taxes. Checks do not have Checks do not have this status. this status.

Relative scarcity: demand (utility related to Relative scarcity: demand (utility related to acceptance for goods and services) and acceptance for goods and services) and supply (controlled by FED) relationshipsupply (controlled by FED) relationship

Value of MoneyValue of MoneyValue of MoneyValue of Money

Purchasing power of money is Purchasing power of money is the real value.the real value.

The amount a dollar will buy The amount a dollar will buy varies inversely with the price varies inversely with the price level. level.

D = 1/PD = 1/P D=Value of the $D=Value of the $P= Price levelP= Price level

Money and PricesMoney and PricesMoney and PricesMoney and Prices