PRINCIPLES OF MACROECONOMICS 2e

for AP Courses

Chapter 13 Money and Banking

PowerPoint Image Slideshow

COLLEGE PHYSICS

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Chapter # Chapter Title

PowerPoint Image Slideshow

CH.13 OUTLINE

Cowrie Shell or Money?

• Is this an image of a cowrie shell or money?
• The answer is: Both.
• For centuries, people used the extremely durable cowrie shell as a medium of exchange in various parts of the world.

(Credit: modification of work by “prilfish”/Flickr Creative Commons)

13.1 Defining Money by Its Functions

Functions for Money

Commodity versus Fiat Money

Commodity versus Fiat Money, Continued

A Silver Certificate and a Modern U.S. Bill

• Until 1958, silver certificates were commodity-backed money - backed by silver, as indicated by the words “Silver Certificate” printed on the bill, pictured at bottom.
• Today, The Federal Reserve backs U.S. bills, but as fiat money (inconvertible paper money made legal tender by a government decree). (Credit: “The.Comedian”/Flickr Creative Commons)

13.2 Measuring Money: Currency, M1,

and M2

M1 Money

M2 Money

The Relationship between M1 and M2

Money

• M1 and M2 money have several definitions, ranging from narrow to broad.
• M1 = coins and currency in circulation + checkable (demand) deposits + savings deposits.
• M2 = M1 + money market funds + certificates of deposit + other time deposits.

Where Does “Plastic Money” Fit In?

13.3 The Role of Banks

Banks as Financial Intermediaries

Banks as Financial Intermediaries,

Illustrated

• Banks act as financial intermediaries because they stand between savers and borrowers.
• Savers place deposits with banks, and then receive interest payments and withdraw money.
• Borrowers receive loans from banks and repay the loans with interest.
• In turn, banks return money to savers in the form of withdrawals, which also include interest payments from banks to savers.

A Bank’s Balance Sheet

A Bank’s Balance Sheet

• This figure shows a hypothetical and simplified balance sheet for the Safe and Secure Bank.

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• T-account - a balance sheet with a two-column format, with the T-shape formed by the vertical line down the middle and the horizontal line under the column headings for “Assets” and “Liabilities”.

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• The “T” in a T-account has:
• the assets of a firm, on the left
• its liabilities, on the right.

Reserves and Bankruptcy

How Banks Go Bankrupt

13.4 How Banks Create Money, Part 1

Singelton Bank Balance Sheet

Singelton Bank Balance Sheet

How Banks Create Money, Part 2

• Singelton Bank issues Hank’s Auto Supply a cashier’s check for the $9 million.
• Hank deposits the loan in his regular checking account with First National Bank.
• The deposits at First National Bank rise by $9 million and its reserves also rise by $9 million.
• Bank lending has expanded the money supply by $9 million.

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• Now, First National Bank must hold some required reserves ($900,000) but can lend out the other amount ($8.1 million) in a loan to Jack’s Chevy Dealership.

First National Balance Sheet

First National Balance Sheet

How Banks Create Money, Part 3

• If Jack’s Chevy Dealership deposits the loan in its checking account at Second National, the money supply just increased by an additional $8.1 million.

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• Making loans that are then deposited into a demand deposit account increases the M1 money supply.

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• This money creation is possible because there are multiple banks in the financial system.
• They are required to hold only a fraction of their deposits,
• loans end up deposited in other banks,
• which increases deposits and the money supply.

Second National Balance Sheet

The Money Multiplier and a

Multi-Bank System

Cautions about the Money Multiplier

Cautions about the Money Multiplier, Continued

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