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CHAPTER 30
Money, Banking, and
the Federal Reserve System
PowerPoint® Slides by Can Erbil
© 2005 Worth Publishers, all rights reserved
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What you will learn in this chapter:
The various roles money plays and the many forms it takes in the economy.
How the actions of private banks and the Federal Reserve determine the money supply.
How the Federal Reserve uses open-market operations to change the monetary base.
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Roles of Money
A medium of exchange
A store of value
A unit of account
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Types of Money
Commodity money
A commodity-backed money
Fiat money
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Monetary Aggregates
The Federal Reserve uses three definitions of the money supply: M1, M2, and M3.
M1 = $1,368.4 (billions of dollars), June 2005
M1 is equally split between currency in circulation and checkable bank deposits.
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Monetary Aggregates
The Federal Reserve uses three definitions of the money supply: M1, M2, and M3.
M2 = $6,510.0 (billions of dollars), June 2005
M2 includes M1, plus a range of other deposits and deposit-like assets, making it about three times as large.
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The Monetary Role of Banks
A bank is a financial intermediary.
Bank reserves are the currency banks hold in their vaults plus their deposits at the Federal Reserve.
The reserve ratio is the fraction of bank deposits that a bank holds as reserves.
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Bank Regulations
Deposit insurance
Capital requirements
Reserve requirements
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Determining the Money SupplyEffect on the Money Supply of a Deposit at First Street Bank
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How Banks Create Money
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Reserves, Bank Deposits, and the Money Multiplier
Increase in bank deposits from $1,000 in excess reserves =
$1,000 + $1,000 × (1 – rr) + $1,000 – (1 – rr)2 + $1,000 – (1 – rr)3 + . . .
this can be simplified to: Increase in bank deposits from $1,000 in excess reserves = $1,000/rr
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The Money Multiplier in Reality
The monetary base is the sum of currency in circulation and bank reserves.
The money multiplier is the ratio of the money supply to the monetary base.
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The Federal Reserve System
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What the Fed Does: Reserve Requirements and the Discount Rate
The federal funds market
The federal funds rate
The discount rate
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Open-Market Operations
The Federal Reserve’s Assets and Liabilities:
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Open-Market Operations by the Federal ReserveAn Open-Market Purchase of $100 Million
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Open-Market Operations by the Federal ReserveAn Open-Market Sale of $100 Million
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The End of Chapter 30
coming attraction:Chapter 31:
Monetary Policy
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