Copyright South-Western, a division of Thomson, Inc. Slide 1 MONEY AND INTEREST 3.1 3.1 The Money...
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Transcript of Copyright South-Western, a division of Thomson, Inc. Slide 1 MONEY AND INTEREST 3.1 3.1 The Money...
Copyright South-Western, a division of Thomson, Inc. Slide 11
MONEY AND INTEREST
3.13.1 The Money Supply3.23.2 Money Creation and Circulation3.33.3 Interest and Interest Rates
33
Copyright South-Western, a division of Thomson, Inc. Slide 22
Lesson 3.1
THE MONEY SUPPLY
Define money supply, and explain how it is measuredDescribe two types of money, and explain the fractional-reserve system
GOALSGOALS
Copyright South-Western, a division of Thomson, Inc. Slide 33
WHAT IS THE MONEY SUPPLY?WHAT IS THE MONEY SUPPLY?WHAT IS THE MONEY SUPPLY?WHAT IS THE MONEY SUPPLY?
The money supply is defined as the liquid assets held by banks and individuals.
The flow of money—and the amount of it flowing—has a direct effect on how the economy performs.
Copyright South-Western, a division of Thomson, Inc. Slide 44
EXPANDING THE MONEY SUPPLYEXPANDING THE MONEY SUPPLYEXPANDING THE MONEY SUPPLYEXPANDING THE MONEY SUPPLY
Extra money in the economy can cause inflationDemand for goods and services increaseSupply decreases, causing prices to rise
Copyright South-Western, a division of Thomson, Inc. Slide 55
MEASURING THE MONEYMEASURING THE MONEYMEASURING THE MONEYMEASURING THE MONEY
Liquidity is a measure of how quickly things may be converted to something of value like cash.
Liquidity is variable, depending on the nature of the asset or liability.
Change in your pocket A certificate of deposit that matures next JuneYour savings account
Less LiquidLess LiquidMore LiquidMore Liquid
Copyright South-Western, a division of Thomson, Inc. Slide 66
AGGREGATE MEASURES OF THE MONEY SUPPLYAGGREGATE MEASURES OF THE MONEY SUPPLYAGGREGATE MEASURES OF THE MONEY SUPPLYAGGREGATE MEASURES OF THE MONEY SUPPLY
M1M1 Money that can be spent immediatelyM2M2 All the money in M1 plus short-term investmentsM3M3 All the money in M1 and M2 plus large depositsMZMMZM Money at zero maturity
Copyright South-Western, a division of Thomson, Inc. Slide 77
THE NATURE OF MONEYTHE NATURE OF MONEYTHE NATURE OF MONEYTHE NATURE OF MONEY
Two types of moneyCommodity money is based on some item of value,
for example, gold or precious stones.Fiat money is money that is deemed legal tender by
the government, and it is not based on or convertible into a commodity.
The fractional-reserve system
Copyright South-Western, a division of Thomson, Inc. Slide 88
Lesson 3.2
MONEY CREATION AND CIRCULATION
Describe how money is created by bank activitiesExplain how money circulates in the United States
GOALSGOALS
Copyright South-Western, a division of Thomson, Inc. Slide 99
HOW MONEY IS CREATEDHOW MONEY IS CREATEDHOW MONEY IS CREATEDHOW MONEY IS CREATED
Printing currency and creating money are two different things.
Money is actually created by the interaction of the demand for it, banks’ use of it, and the Federal Reserve’s supply and control of it.
Copyright South-Western, a division of Thomson, Inc. Slide 1010
DEPOSITS AND RESERVESDEPOSITS AND RESERVESDEPOSITS AND RESERVESDEPOSITS AND RESERVES
Primary reservesSecondary reserves
Copyright South-Western, a division of Thomson, Inc. Slide 1111
THE MULTIPLIER EFFECTTHE MULTIPLIER EFFECTTHE MULTIPLIER EFFECTTHE MULTIPLIER EFFECT
Money on deposit, minus the reserve requirement, can be loaned to customers.
When it is, it creates new deposits, which also go out to customers as loans and create more deposits, thus expanding the amount of money in the system.
Copyright South-Western, a division of Thomson, Inc. Slide 1212
HOW MONEY CIRCULATESHOW MONEY CIRCULATESHOW MONEY CIRCULATESHOW MONEY CIRCULATES
Transfers and circulation The Fed and fiat moneyMoney as an IOU
Copyright South-Western, a division of Thomson, Inc. Slide 1313
Lesson 3.3
INTEREST AND INTEREST RATES
List factors that affect interest ratesExplain which factors the Federal Reserve affects
GOALSGOALS
Copyright South-Western, a division of Thomson, Inc. Slide 1414
INTEREST RATES AND BUSINESSINTEREST RATES AND BUSINESSINTEREST RATES AND BUSINESSINTEREST RATES AND BUSINESS
The money supply and the economy are linked closely to interest rates.
Generally, when rates are high, money is said to be “tight” and business tends to slow because it costs more to acquire capital.
When rates drop, more credit is accessible, and the economy tends to gather speed.
Copyright South-Western, a division of Thomson, Inc. Slide 1515
FACTORS AFFECTING INTEREST RATESFACTORS AFFECTING INTEREST RATESFACTORS AFFECTING INTEREST RATESFACTORS AFFECTING INTEREST RATES
The federal funds rate is the amount of interest charged for short-term, interbank loans.
The discount rate is the interest rate that the Federal Reserve sets and charges for loans to member banks.
The prime rate is the rate that banks charge their best and most reliable customers.
Copyright South-Western, a division of Thomson, Inc. Slide 1616
MONETARY POLICY AND INTEREST RATESMONETARY POLICY AND INTEREST RATESMONETARY POLICY AND INTEREST RATESMONETARY POLICY AND INTEREST RATES
The Federal Reserve sets the discount rate.The Federal Reserve only influences the federal
funds rate.