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7.4 The Money Supply and Introduction to the Federal Reserve System

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Greg Caskey

on 5 June 2018

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Transcript of 7.4 The Money Supply and Introduction to the Federal Reserve System

Money Supply
Money is anything that is generally acceptable to sellers in exchange for goods and services.

Money Supply
The total amount of money in circulation within a country at some time period
Guess: How much money do you think is in circulation in the US economy?
How much of that do you think is "paper money"
Monetary Policy
Regulating the money supply to help the economy achieve a full-employment, noninflationary level of total output.
Conducted by the Federal Reserve Bank

M1 Money Supply
Most liquid
- can quickly be converted to currency

Consists of:
- bills and coins that we use.
legal tender- required by law to be accepted as payment
Demand Deposits
- checking accounts held at banks
Can be converted into currency "on demand"
Debit cards fall into this category
Travelers checks-
often used by individuals who are traveling on vacation to foreign countries (not so much anymore)
Other Checkable deposits (OCDs)

M2 Money Supply
Assign correctly:
m1? m2 ? Not in Money Supply?
M3 Money Supply
Less Liquid
- relatively easily converted to cash

Consists of:
Includes everything in M1
Savings deposits
Small Denomination time deposits
(Certificates of Deposit (CDs
Require savers to leave their money on deposit for a specific period of time (5 months to 10 years, etc)
Higher interest rate (incentive), but if you withdraw money early, you may have to pay a fee
Money Market mutual funds
Can make a limited number of withdrawals within a certain time period
Generally, theses have lower interest rates than CDs

M2= Most commonly used measure for the money supply

checking acct
savings acct
travelers' check
Money Market Mutual Fund
20$ bill
Example: What is the M1 total?
7.4 The Money Supply and Introduction to the Federal Reserve System
Normally, currency is about 50% of M1.
U.S. currency today is not backed by gold or silver, as it was in the past
In 1971, Richard Nixon put an end to the US "Gold Standard"
Now, our money is backed only by the "confidence and trust" of the public.
It is a fiduciary monetary system. (“Fiducia” means “trust” in Latin.)

Types of Money
Fiat money- Money by declaration. It has no intrinsic value.
Commodity money- Money that has intrinsic value.
Money backed by gold or silver (or something else of value)

Our Currency
The government may get involved in the monetary system to help people reduce transaction costs. Using gold as a currency is costly because the purity and weight has to be verified. Also,coins are more widely recognized than gold bullion.

The government then accepts gold from the public in exchange for gold-certificates— pieces of paper that can be redeemed for actual gold.
If people trust that the government will give them the gold upon request, then the currency will be just as valuable as the gold itself—plus, it is easier to carry around the paper than the gold.
The end result is that because no one redeems the gold anymore and everyone accepts the paper, they will have value and serve as money.
Gold Standard
Nixon, Bretton Woods
What is the M2 money supply?
Least liquid
- not easily converted to cash
M3 is no longer kept by the fed

Consists of:
Includes everything in M2 (and thereby M1)
Large savings accounts ($100,000 and above)
Institutional Money Market accounts

Senator Bunning: The findings of the M3 report provide pertinent information to the public — from economists to investors and to industries which all use M3 report findings for economic forecasting, investing and business decisions. … Will you work to reverse this policy and commit to keeping the M3 report and its findings available and open to the public? What is the rationale and reasoning behind the Federal Reserve decision to keep the M3 information from the public?

Bernanke: The Federal Reserve will not withhold the M3 data from the public; rather, it will no longer collect and assemble that information.

Federal Reserve System
The nation's central bank.
Founded by Congress in under the Federal Reserve Act of 1913 to “provide the nation with a safer, more flexible and stable monetary system”
Main Roles:
Issuing paper currency
Runs the system for transferring funds between banks
Regulating the nation's banking institutions
“Lender of Last Resort”: holding the banking system's reserves
Conducting Monetary Policy (regulating the money supply)

Video Clips
Ben Bernanke
A seven-member Board of Governors in Washington D.C.
Analyzes domestic and international economic developments
Supervises and regulates the operations of the Federal Reserve Banks
Has responsibility for Americas payments system
Oversees and administers most consumer credit protection laws.
The board of governors alone has authority over changes in reserve requirements, and it must approve any change in the discount rate initiated by a Federal Reserve Bank.
12 Regional Federal Reserve Banks
Federal Open Market Committee
The Board of Governors and the heads of the twelve banks (called Presidents) meet eight times a year to decide on monetary policy.
The Federal Open Market Committee (FOMC) consists of twelve members:
The seven members of the Board of Governors of the Federal Reserve System
The president of the Federal Reserve Bank of New York;
And four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.
The rotating seats are filled from the following four groups of Banks, one Bank president from each group:
Boston, Philadelphia, and Richmond
Cleveland and Chicago
Atlanta, St. Louis, and Dallas
Minneapolis, Kansas City, and San Francisco
Organization of the Federal Reserve System
Money Supply Practice Problem
why does the Fed target 2% inflation
Full transcript