MONEY SUPPLY

Our Money Supply• Money consist of coins, paper money,

demand (or checking) deposits, and checklike deposits (commonly called NOW – or negotiable order of withdrawal – accounts) held by the nonbank public– Coins and paper money together are considered

currency– Six of every ten dollars in our money supply are

demand deposits and other checkable deposits• Virtually all the rest is currency

– Checks are not money but checking deposits are

13-12Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

13-13

Our Money Supply

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Federal Reserve Statistical Release, April 5, 2001

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Our Money Supply: M1

Currency

+ Demand deposits

+ Other checkable deposits

+ Traveler’s checks

M1(traditionally our basic money supply)

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

M1 = $1,368.4 (billions of dollars), June 2005

The Federal Reserve uses three definitions of the money supply: M1, M2, and M3.

M1 is equally split between currency in circulation and checkable bank deposits

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Our Money Supply: M2 Currency

+ Demand deposits

+ Other checkable deposits

+ Traveler’s checks

M1

+ Savings deposits

+ Small-denomination time deposits (less than $100,00)

+ Money market mutual funds held by individuals

M2 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

M2 = $6,510.0 (billions of dollars), June 2005

• The Federal Reserve uses three definitions of the money supply: M1, M2, and M3.

M2 has a much broader definition: it includes M1, plus a range of other deposits and deposit-like assets, making it about three times as large.

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Our Money Supply: M1, M2, M3 Currency

+ Demand deposits

+ Other checkable deposits

+ Traveler’s checks

M1

+ Savings deposits

+ Small-denomination time deposits (less than $100,00)

+ Money market mutual funds held by individuals

M2

+ Large denomination time deposits (more than $100,00)

+ Money market mutual funds held by institutions

+ Other less liquid assets

M3

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Our Money SupplyM1, M2, and M3, January 2001

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

M1=1,107 M2=5,111 M3=7,361

Currency incirculation

539

Traveler'schecks

8

Demanddeposits

309

Othercheckabledeposits

251

Money market mutual fundsheld by institutions

903

Other lessliquid assets

550

Large-denominationtime deposits

797

M25111

Savingdeposits

1970M11107

Money marketmutual funds

held by individuals985 Small-denomination

time deposits1049

Federal Reserve Bulletin

Our Growing Money Supply

13-18Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000

20181614121086420

Ð2Ð4

Annual Percentage Change in the Money Supply, M1, 1960-2000

Credit Cards

• Is the Credit Card in your wallet Money?– It is accepted everywhere(Medium of exchange)

– You get a bill (Unit of Account)