3/4/16
Money
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Uses of money
-Medium exchange- Barter and trading
-Unit of Accounting-It establishes economic
value
-Store of Value- money holds its value over
a period of time whereas products may not.
·
Types of money
-Commodity money- it gets its value from
the type of material from which it is made (ex. Gold and silver coins)
-Representative money- Paper money that is
backed by something tangible
-Fiat money- money because the government
says so.
·
Characteristics of money
-Divisible- breaking down money
-Portable- carry
-Uniform- a dollar is a dollar
-Acceptable- everywhere we go
-Scarce
-Durable
·
Money supply
Liquid- easy to change to cash
-M1 money- Currency, checkable deposits
(demand deposits), travelers check. 75% of money comes from this. Most liquid.
-M2 money-
Consists of M1 money, savings accounts, and deposits made by banks outside the
USA.
-M3 money- Consists of M2 and certificate
of deposits, better known as CDs.
CD- Money in a bank for x amount of time.
Get interest, but pulled out early you are charged.
3/9/16
·
Time Value of Money
-Is a dollar today worth more than a dollar
tomorrow?
Yes, because of inflation.
This reason is the reason for charging and
paying interest.
·
Let v= Future value of money
·
P= Present value of $
·
R=real interest rate (nominal rate- inflation
rate)
Expressed as a decimal
N= Years
K= number of times interest is credited per
year
·
The simple interest formula
V=( 1 + r) ^n *p
·
The compound interest formula
V= (1 + r/K) ^ nk *p
·
Demand for money has an inverse relationship
between nominal rates and the quantity of money demanded
·
What happened to the quantity demanded of money
when interest rates increase?
-Quantity demanded falls because
individuals would prefer to have interest earning assets instead of borrowed
liabilities.
·
What happens to the quantity demanded when
interest rates decrease?
-Quantity demanded increases. There is no
incentive to convert cash into interest earning assets.
·
The money demand shifters:
Change in price level
Change in income
Changes in taxation that affects investment
·
Increasing money supply, interest rate decrease,
investment increases, AD Increase
·
Decreasing money supply, interest rate increase,
investment decreases, AD decrease
·
Financial Sector:
·
Financial assets- Something that you own.
·
Liabilities-Something you owe
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Financial assets
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Financial Liabilities
|
·
Interest Rate- cost to borrow money
·
Stocks- a share of a company you buy
·
Bonds- lend money to the government and promise
to pay you back with interest.
|
Stocks
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Bonds
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What do Banks do
·
A bank is a financial intermediary
-uses liquid assets (i.e. bank deposits) to
finance the investments of borrowers
-Process is known as Fractional Reserve
bank
A system in which depository institutions
hold liquid assets less than the amount of deposits.
-can take the form of:
1. currency in bank vaults
2. Bank reserves- deposits held at the
federal reserve.
·
T- Account (balance Sheet)
·
Assets (amounts owned)
-items to which a bank holds legal claim
-the uses of funds by financial
intermediaries
·
Liabilites (Owed)
-The legal claims against
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Liabilities (owe)
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Assets(own)
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3/10/16
·
Reserve requirements:
-the fed requires banks to always
have some money readily available to meet consumer’s demand for cash.
-the amount is set but the Fed, is
the required reserve ration
-the required reserve ratio is the
% of demand deposits (checking account balances) that must not be loaned out
-Typically the required reserve
ration= 10%
·
Type of multiple deposit expansion questions:
-Type 1: calculate the initial change in
excess reserves (Amount a single bank can loan from the initial deposit)
-Type 2: calculate the change in loans in
the banking system
-Type 3: calculate the change in the money
supply (sometime 2&3 have the same result) Ex. No Fed involvement
·
Monetary ratio: 1/ reserved requirement
·
Total change in deposits in the bank (Maximum
change in money supply) - ER X MM + Deposit
3/21/16
3 tools of monetary
1. Reserve requirement: only a
small percent of your bank is in the safe. The rest of your money has been
loaned out. This is called “Fractional Banking”. Fed sets amount of banks must
hold. Reserve requirement (reserve ratio) is the % of the deposits that the bank
must hold in reserve and not loan out. When FED increases money supply it
increases the amount of money held in bank deposits.
-statement 1: if there is a recession what should FED do
to reserve requirement? Decrease reserve ratio 1) Banks hold less money and
have more excess reserves. 2) banks create more money by loaning out of access.
3) money supply increases interest rates fall AD goes up
-Statement 2: if there’s an inflation what should FED do
to the reserve requirements? Increase reserve ratio
2. Discount rate: discount rate is
the interest rate that the FED charges commercial banks.
EX: to increase money supply the FED should decrease
discount rate. To decrease money, supply the FED should increase the discount
rate.
3. OMO (open market operations):
FEDS buy / sell government bonds (securities). This is most important and
widely used monetary policy.
-to increase money supply FEDs should buy government
securities
- to decrease money supply FEDs should sell government
securities.
Federal Fund rate: Where FDIC member’s banks loan each
other overnight funds.
Prime Rate: the interest rate that banks give to their
credit worthy customers.
3/29/16
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When a customer deposits cash or withdraws cash
from their demand deposit acct., it has no effect on money supply.
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Single Bank ex. Chase
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Banking System ex.
Chase, wells, B.O.A.
|
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-loan money from excess reserves
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- ER X Multiplier
*total money supply ^
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It only changes:
·
The composition of the money
·
Excess reserves
·
Required reserves
When the FED buys or sells bonds ER is
created
