Chapter Six Chapter Six The Demand for MoneyThe Demand for Money

1. Monetary Aggregates1. Monetary Aggregates

Components of the Money Stock Components of the Money Stock M M00－－－－－－ CurrencCurrency in Circulation y in Circulation

MM11－－－－－－ MM22－－－－－－ MM33－－－－－－ L L －－－－－－

2. The Functions of Money 2. The Functions of Money

means of payments or medium of means of payments or medium of

exchange; exchange;

store of value; store of value;

unit of account; unit of account;

standard of deferred payment;standard of deferred payment;

international money international money

3. Demand for Money: Theory 3. Demand for Money: Theory

The The transactions motivetransactions motive

is the demand for money arising from is the demand for money arising from

the use of money in making regular the use of money in making regular

payments. payments.

The Inventory Approach The Inventory Approach

Square-root Formula orSquare-root Formula or

Baumol-Tobin ModelBaumol-Tobin Model. .

The Precautionary MotiveThe Precautionary Motive

is the demand for money to meet is the demand for money to meet

unforeseen contingencies.unforeseen contingencies.

The Speculative motiveThe Speculative motive

arises from uncertainties about the money arises from uncertainties about the money

value of other assets that an individual value of other assets that an individual

can hold.can hold.

4. Empirical Evidence 4. Empirical Evidence

Elasticity of real M1 money demand Elasticity of real M1 money demand

Elasticity of real M2 money demandElasticity of real M2 money demand

5. The Income Velocity of Money and the 5. The Income Velocity of Money and the

Quantity TheoryQuantity Theory

Chapter SevenChapter SevenThe Fed ,Money,and CreditThe Fed ,Money,and Credit

1. Money stock determination: 1. Money stock determination:

Public:Public:

The currency-deposit ratioThe currency-deposit ratio

Business bank: Business bank:

The reserve-deposit ratio The reserve-deposit ratio

The central bank The central bank

High-powered moneyHigh-powered money

2. Money multiplier 2. Money multiplier

Currency

Currency Reserves

Deposits

Money multiplierMoney multiplier

A numerical example:A numerical example:

3. The Instruments of Monetary Control3. The Instruments of Monetary Control

Open Market Operation Open Market Operation

The Fed Balance Sheet The Fed Balance Sheet

Foreign Exchange and the Base Foreign Exchange and the Base

Loans and Discounts Loans and Discounts

The Treasury and the Fed The Treasury and the Fed

Financing Federal Deficits Financing Federal Deficits

The balance sheet for central bankThe balance sheet for central bank （（ U.S)U.S)

Assets (sources)Assets (sources) Liabilities (uses)Liabilities (uses)

Gold & FX CurrencyGold & FX Currency

Credit Held by publicCredit Held by public

Loans and discount Vault cashLoans and discount Vault cash

Govt. securities Bank deposits Govt. securities Bank deposits

Net other credit Net other liabilitiesNet other credit Net other liabilities

Monetary base Monetary base Monetary base Monetary base

(sources) (uses)(sources) (uses)