Ch12' Money

1
Ch12. Money Banking

• Chapter Objectives
• The functions of money
• What money is
• M1, M2, and M3.
• The demand for money
• The origins of banking
• The creation and destruction of money
• Branch banking and bank chartering
• The FDIC
• The savings and loan debacle

2
Ch12. Money Banking

• The Four Jobs of Money
• medium of exchange
• standard of value
• store of value
• standard of deferred payment
• Money Supply
• Money consists of coins, paper money, demand
  deposits, and checklike deposits.
• M1, M2 and M3

3
Ch12. Money Banking

• Our money supply includes not just currency and
  demand deposits but also travelers check and
  what the Federal Reserve terms other checkable
  deposits,
• M1 currency, demand deposits, travelers checks,
  and other checkable deposits.
• M2 M1 savings, small-denomination time
  deposits, and money market funds
• M3 M2 large-denomination time deposits
• The Demand for Money
• Why people hold money?
• Keynes to make transactions, for precautionary
  reasons, and to speculate

4
Ch12. Money Banking

• Four Influences on the Demand for Money
• (1) the price level (2) income (3)the interest
  rate and (4) credit availability
• As interest rates rise, people tend to hold less
  money
• As the rate of inflation rises, people tend to
  hold more money
• As the level of income rises, people tend to hold
  more money
• People tend to hold less money as credit
  availability increases
• The Demand Schedule for Money
• The transactions demand for money is somewhat
  responsive to interest rate changes
• The precautionary demand for money is least
  responsive to interest rate changes because
  people have a specific purpose for holding these
  funds.
• The speculative demand for money is the most
  responsive to interest rate changes

5
Ch12. Money Banking

• Determination of the Interest Rate
• what is interest rate
• As the interest rate declines, the amount of
  money that the public wished to hold goes up.
• If we think of the interest as the price of
  money, then the interest rate, like the price of
  anything else, is set by the forces of supply and
  demand.
• The supply of money is controlled by the Federal
  Reserve.
• Who control interest rates? The Fed, the banks,
  the people who borrow money.
• Banking
• Bank Lending
• Borrow money at low interest rates and lend that
  money out at much higher interest rates

6
Ch12. Money Banking

• Financial Intermediaries(banks)
• Financial Intermediaries channel funds from
  savers to borrowers. Basically they repackage the
  flow of deposits, insurance premiums, pension
  contributions, and other forms of savings into
  larger chunks for large business borrowers.
• The Creation and Destruction of Money
• Banks create money by making loans. Money is
  destroyed when a loan is repaid to the bank.
• Limits to Deposit Creation
• Bankers would expand their loans only up to the
  point at which they had just 2 percent cash
  reserves.
• Bank Regulation
• The three types of branch banking are
• Unrestricted branching(may open branches
  throughout the state)
• limited branching(may be allowed to open branches
  only in contiguous communities)
• Unit banking(state law forbids any branching
  whatsoever)

7
Ch12. Money Banking

• State and Nationally Chartered Banks
• All nationally chartered banks must join the
  Federal Reserve System. All Federal Reserve
  member banks must join the FDIC. Only a small
  percentage of the state-chartered banks are
  members of the Federal Reserve. Nearly all banks
  are members of the FDIC.
• The FDIC(The Federal Deposit Insurance
  Corporation)
• The FDIC taxes its members from 0 to 27 cents for
  every 100 of deposits in exchange for insuring
  all member bank deposits of up to 100,000.
• Will the FDIC run out of money? Not really. The
  Congress, the Federal Reserve, the Treasury, and
  all the financial resources of the U.S.
  government are committed to the preservation of
  this institution.

8
Ch13 The Federal Reserve Monetary Policy

• Chapter Objectives
• The organization of the Federal Reserve System
• Reserve requirements
• The deposit expansion multiplier
• The tools of monetary policy
• The Feds effectiveness in fighting inflation and
  recession
• The Banking Act of 1980

9
Ch13 The Federal Reserve Monetary Policy

• The Federal Reserve District Banks
• There are 12 Federal Reserve District Banks.
• All the paper currency issued by the Boston
  Federal Reserve District Bank in the First
  District has an A on the face of the bill about
  an inch and a half from the left edge. Currency
  issued by the Second Federal Reserve District
  Bank in New York has a B, while the Philadelphia
  Bank in the Third District has a C.
• A commercial bank becomes a member by buying
  stock in the Federal Reserve District Bank.
  Effective control is really exercised by the
  Federal Reserve Board of Governors in Washington,
  D.C.
• The Board of Governors
• The seven members of the Board of Governors are
  nominated by the president, subject to
  confirmation by the Senate.
• Independence of the Board of Governors The Fed
  is an independent agency.

10
Ch13 The Federal Reserve Monetary Policy

• Legal Reserve Requirements
• The feds most important job is to control the
  money supply.
• Actual reserves-required reserves excess
  reserves
• Treasury bills, notes, certificates, and bonds
  are generally considered a banks secondary
  reserves.
• Deposit Expansion
• Deposit expansion mulitplier 1/reserve ratio
• Cash, checkes and electronic money
• The Tools of Monetary Policy
• FOMC
• Discount Rate Changes
• Changing Reserve requirements