Money and Banking

Chapter 13

Chapter 13 Table 13.1Monetary Aggregates: M1, M2,

& M3

Demand for Money Transactions Demand

Depends on Income (Y) Asset Demand

Depends (Inversely) on Interest Rates (r)

r is the opportunity cost of holding currency or a checking account balance

r is the interest you give up by holding money

Chapter 13 Figure 13.1

Total Demand for Money

The Money Market and the Interest Rate Changes in the Supply of Money move the

Money Market out of Equilibrium When the Supply of Money (MS or SM) is

increased There is a surplus of money People respond by buying bonds with the

surplus money The additional demand for bonds Increases the price of bonds Lowering the interest rate

Reestablishing equilibrium in the Money Market

Chapter 13 Figure 13.2

The Money Market and the Interest Rate: Decreasing the Money Supply

When the Supply of Money (MS or SM) is decreased

There is now a shortage of money People respond by selling bonds to

acquire more money The additional supply of bonds Lowers the price of bonds Raising the interest rate

Reestablishing equilibrium in the Money Market

Chapter 13 Figure 13.2

Chapter 13 Figure 13.3Structure of the Federal

Reserve System

Chapter 13 Figure 13.4The 12 Federal Reserve Districts

and Banks

Chapter 13 Table 13.2

Kinds of Financial Institutions