Uses of Money:
- Medium of exchange - where one is able to buy goods and services
- Unit of account - establishes economic work
- Store of value - money holds its value over a period of time
- Commodity money - swapping goods
- Representative money - I.O.U.s
- Fiat money - a government-established money
- Durability
- Portability
- Divisibility - can be divided down
- Uniformity - same throughout the nation
- Scarcity
- Acceptibility
- M1 money:
- consists of currency in circulation
- check-able deposits (demand deposits)
- traveler's checks
- M2 money:
- consists of M1 money + savings accounts + money marker accounts + deposits held by banks outside the U.S.
- Significance of a Fractional Reserve System
- Banks can create money by lending more than their reserve
- Required reserves doesn't prevent bank panics because banks must keep required reserves
- Reserve requirement gives federal government control of how much money banks can create
- Control the nation's money supply through monetary policy
- Issue paper currency
- Serve as a clearing house for checks
- regulate banking activity
- serve as a bank for banks
- Is a statement of assets and claims summarizing the financial position of a firm or bank during a certain point in time
- MUST BE BALANCED AT ALL TIMES
- Assets - what you own
- Liabilities - What you owe
Multiple Deposit Expansion:
- Assets:
- Reserves
- required reserves - % required by the Federal Government to keep on hand to meet demand
- excess reserves - % of reserves over and above the amount needed to satistfy the minimum reserve ratio
- loans to firms, consumers and other banks
- loans to the government
- bank property - if bank fails, buildings can be liquidated
- Demand deposits - $$ put into an account
- timed deposits
- loans from - Fed reserves and other banks
- Shareholders Equity - to set up a bank, you must invest your own money in it
- The Fed. requires banks to always have some money readily available
- The amount set b the Fed is the required reserve ratio
- Required reserve ratio is the % of demand deposits that must nit be loaned out
- Typical required reserve ratio is 10%
- It is the amount of demand deposits that must be stored as vault cash or as Federal funds in the bank's account with the Federal Reserve
- The required reserve ratio determines the money multiplier (1 / required reserve ratio)
- Decreasing the reserve ratio increases the rate in which money is created = expansionary
- Increasing the reserve ratio decreases the rate in which money is created = contractionary
- Money multiplier:
- Shows the impact of a change in demand on loans and eventually the money supply
- Indicates the total number of dollars created into the banking by each $1 addition to the monetary bank
Fiscal and Monetary Policy:
- Congress controls fiscal policy - can either tax or spend
- FED controls monetary policy - open-market operation
- Required reserve - money needed to keep in vault or reserves
- Discount rate - interest rate charged by the FED for overnight loans to commercial banks
- Federal Fund Rate - interest rate charged by one commercial bank for overnight loans to another bank
Loanable Funds Market:
- Market where savers and borrowers exchange funds (Qlf) at the real interest rate (r%)
- The demand for loanable funds, or borrowing comes from households, firms, government and the foreign sector.
- Supply of loanable funds or savings comes from households. Supply of loanable funds is also the demand for bonds
- Change in the demand for loanable funds:
- More borrowing = more demand for loanable funds = shift to the right
- Less borrowing = less demand for loanable funds = shift to the left
- More saving = more supply of loanable funds = shift to the right
- Less saving = less supply of loanable funds = shift to the left
Hi! Just wanted to add on to your notes. When a bank loan is repaid, the supply of money is decreased. Although it seems paradoxical, granting a bank loan creates money, while repaying a bank loan destroys money.
ReplyDeleteThere are only 3 tools of monetary policy, open market operations, the discount rate, and the reserve requirement. The federal fund rate is not a part of the 3 tools that the Fed can use to manage the money supply, it is actually to help implement those policies.
ReplyDeleteGreat detailed notes. However you should also add what the prime rate is. (interest rate banks charge to most credit worthy customers) It was an important term to know in unit 4.
ReplyDeleteI've noticed that you've left out a couple things under the loan able funds market! First off it's good to remember that the demand for loanable funds is borrowing and the supply of loanable funds is saving. Also that the supply of loanable funds is inverse to the r%. If Slf increase than r% decreases and if Slf decreases than r% increases. Some examples would be during a government budget surplus Slf would increase and during a government budget deficit, Slf would decrease.
ReplyDeleteI also noticed that you had left out the review!
Required Reserves = (Amount of Deposit) x (Required Reserve Ratio)
Excess Reserves = (Total Reserves) - (Required Reserves)
Maximum amount a single bank can loan = the change in excess reserves caused by a deposit
The money multiplier = 1/required reserve ration
Total Change in Loans = (amount single bank can lend) x (money multiplier)
Total Change in the money supply = (total change in loans) + ($ amount of Fed action)
Total change in demand deposits = (total change in loans) + (any cash deposited)