CHAPTER 13: MONEY

AND BANKING

SUBMITTED BY:
CARREON, ALLIAH DIANNE
ARIOLA, IRISH MAE
 Money is an economic unit that functions as a
generally recognized medium of exchange for
transactional purposes in an economy.
 The functions of Money
a. Medium of exchange- usable for buying and
selling of goods and services.
b. Unit of account- The value of something is
measured in a specific currency.
c.Store value- A store of value is the function of
an asset that can be saved, retrieved and
exchanged at a later time, and be predictably
useful when retrieved.
 Money Definition (M1)- consist of currency
(coins and paper money)in the hands of the
public and all checkable deposits (all deposits
in commercial banks and thrift or savings
institutions on which checks of any size can be
drawn.)
Currency : Coins + Paper money
 Money definition (M2)
Near-monies-a financial economics term
describing non-cash assets that are highly liquid
and easily converted to cash.
 3 Categories of near- monies included in the
M2 definition of money.
a. Saving deposits, including money market
deposits accounts.
b. Small (less than $100,000) time deposits.
c. Money market mutual funds.
d. Money, M2 = M1 + savings deposits,
including MMDA’s + small
(less than $100,000) time
deposits + MMMFs
 Money definition (M3)- includes large ($100,000
or more) time deposits, usually owned by
businesses as certificates of deposits.
a. Money, M3= M2 + large ($100,000)or more
time deposits
 Money as debt- the major components of the
money supply- paper money and checkable
deposits- are debts or promises to pay.
 Legal tender is any thing recognized by law as a
means to settle a public or private debt or
meet a financial obligation, including tax
payments, contracts, and legal fines or damages.
 The value of money is rooted not in specified
quantities of precious metals but in the amount
of goods, services and resources that money
will purchase.
 Government’s responsibility in stabilizing
the value of the monetary unit calls for
1. The application of appropriate fiscal
properties.
2. Effective control over the supply of
money.
 The demand for money has two components:
transactional demand and asset demand.
 The amount of money needed to cover the
needs of an individual, firm, or nation. That
is, transactions demand for money is a measure
of how much of a certain currency people need
in order to buy the goods and services they
use.
 Asset demand is money kept as a store of
value for later use. Asset demand varies
inversely with the interest rate, since that
is the price of holding idle money.
 Total demand for money will equal
quantities of money demanded for assets
plus that for transactions.
 The equilibrium interest rate is determined by
money demand and supply, it occurs when people
are willing to hold the exact amount of money
being supplied by the monetary authorities.
 Bond prices and interest rates are inversely related.
 The money market is the trade in short-term debt
investments. At the wholesale level, it involves large-
volume trades between institutions and traders. At
the retail level, it includes money market mutual
funds bought by individual investors and money
market accounts opened by bank customers.
 The US banking system consists of a. the Board of
Governors of the Federal Reserve System, b. the
Federal Reserve Banks, and c. some 7800
Commercial Banks and 11,800 thrift institutions
(mainly credit unions). The Board of Governors is
the basic policymaking body for the entire
banking system . The directives of the Board and
the Federal Open Market Committee (FOMC)
are made effective through the 12 Federal
Reserve Banks, which are simultaneously a.
central banks, b. quasi-public banks, c. bankers’
banks.
 The major functions of the Fed are to a.
issue Federal Reserve Notes, b. set reserve
requirements and hold reserves deposited
by banks and thrifts, c. lend money to banks
and thrifts, d. provide for the rapid
collections of checks, e. act as the fiscal
agent for the Federal Government , f.
supervise the operation of the banks, g.
regulate the supply of money in the best
interest of the economy.
 Other recent banking developments of
significance include the consolidation of
the banking and thrift industry; the
convergence of services offered by banks,
thrifts, mutual funds, securities firms, and
pension companies; the globalization of
banking services; and the emergence of
the internet and electronic money,
including smart cards.