Money Supply and Money Supply and Balance SheetsBalance Sheets

Money SupplyMoney Supply Money Supply = all the “money” in Money Supply = all the “money” in

society, defined in several wayssociety, defined in several ways M1M1

– coins, currency held by the public, coins, currency held by the public, – traveler's checks, traveler's checks, – checking account balanceschecking account balances– ““cash” accounts (e.g., debit cards)cash” accounts (e.g., debit cards)

M2 (Common economic indicator used to M2 (Common economic indicator used to forecast inflation)forecast inflation)– M1 M1 – Savings accountsSavings accounts– small short-term time deposits (CDs), small short-term time deposits (CDs), – overnight “repos” at commercial overnight “repos” at commercial

banksbanks– non-institutional money market non-institutional money market

accounts. accounts. M3 M3

– M2M2– large time depositslarge time deposits– ““repos” of maturity greater than one repos” of maturity greater than one

day at commercial banksday at commercial banks– institutional money market accountsinstitutional money market accounts

Money SupplyMoney Supply

Source: St. Louis Fed

Balance Sheet BasicsBalance Sheet Basics Assets = are anything of Assets = are anything of

value (deposits, houses, value (deposits, houses, cars, the shirt on your back)cars, the shirt on your back)

Liabilities = obligations to Liabilities = obligations to other parties (debts)other parties (debts)

Net Worth = Assets — Net Worth = Assets — LiabilitiesLiabilities

““Fractional reserve banking Fractional reserve banking system” system”

– Banks keep only fraction of Banks keep only fraction of their deposits: “reserves”their deposits: “reserves”

– system in which banks hold system in which banks hold reserves whose value is less reserves whose value is less than the sum of claims than the sum of claims outstanding on those outstanding on those reservesreserves

– See pg 479: chart on See pg 479: chart on reservesreserves