Ch 12 Lo_money_and_banking

8/17/2019 Ch 12 Lo_money_and_banking

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Money and Banking

Del Mar College, John Daly©2002 South-Western Publishing, A Diision o! "ho#son $earning


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Money and its %un&tion

• Money is any good that is 'idely a&&e(ted !or (ur(oses o! e)&hange and in the re(ay#ent o!

debts*• Money redu&es transa&tion &osts be&ause it is a

#ediu# o! e)&hange*

• Money is a ter# o! a&&ount* We don+t hae to

kee( (ri&es in oranges, a((les, or &o#(uters#oney (roides this role !or us*

• Money is a store o! alue, it #aintains its alueoer ti#e* We a&&e(t (ay#ent !or our e!!orts and

kee( #oney until 'e s(end it*


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Money s* Barter

• Making e)&hanges takes longer in a barter syste#.

not only do you hae to !ind so#ething you 'ant,

but you hae to hae so#ething the seller 'ants as'ell*

• So#e goods are #ore readily a&&e(ted than other

goods*

• /istori&ally, goods that hae eoled into #oney

are. gold, siler, &o((er, &attle, ro&ks, and shells*


4/20

Money, $eisure, and ut(ut

• A #oney based e&ono#y!rees u( ti#e s(entlooking !or so#eone

interested in your goods,'ho has so#ething you'ant*

• A (erson+s standard o!liing is, to a degree,de(endent on the nu#berand 1uality o! goods he&onsu#es and the a#ounto! leisure he &onsu#es*


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What ies Money its alue3

• ur #oney has alue be&ause o! its generala&&e(tability*

• We a&&e(t (a(er dollars be&ause 'e kno'that other (eo(le 'ill a&&e(t dollars later'hen 'e try to s(end the#*

•

Money has alue to (eo(le be&ause it is'idely a&&e(ted in e)&hange !or othergoods that are aluable*


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resha#+s $a'. ood Money

and Bad Money• Bad #oney dries

good #oney out o!

&ir&ulation*• 4n truth, bad #oney

dries out good #oneyi! both #oneys hae

the sa#e !a&e alue,hae di!!erent intrinsi&alues, and are !i)ed atan e)&hange rate o!one to one*


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De!ining the Money Su((ly

• M5 is so#eti#esre!erred to as the

narrow definition ofthe money supply or astransactions money*

• M5 &onsists o!

&urren&y held outside banks, &he&kablede(osits, and traeler+s&he&ks*


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De!ining the Money Su((ly. M2

• M2 is so#eti#es re!erred to as the broad

de!inition o! the #oney su((ly*

• M2 is #ade u( o! M5 (lus s#all-deno#ination ti#e de(osits, saings

de(osits, #oney #arket a&&ounts, oernight

re(ur&hase agree#ents, and oernighteurodollar de(osits held by 6S residents*


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Where Do Credit Cards %it 4n3

• A &redit &ard is an instru#ent or do&u#ent

that #akes it easier !or the holder to obtain

a loan*• Credit &ard transa&tions shi!t around the

e)isting 1uantity o! #oney bet'een arious

indiiduals and !ir#s, but do not &hange tototal #oney aailable*


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7 8 A

• Why 9not ho': did #oney eole out o! a barter e&ono#y3

• 4! indiiduals re#oe !unds !ro# their&he&kable de(osits and trans!er the# totheir #oney #arket a&&ounts, 'ill M5 !alland M2 rise3 ;)(lain your ans'er*

• /o' does #oney redu&e the transa&tion&osts o! #aking e)&hanges3


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/o' Banking Deelo(ed

• ;arly bankers usedgolds#ith+s 'arehousere&ei(ts*

• ;arly bankers began toissue re&ei(ts !or #oregold than they had onhand*

• "his 'as the beginning o! !ra&tionalresere banking*


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"he %ederal


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"he Money Creation Pro&ess

• "he su# o! bank de(osits at the %ed and the

bank+s &ash ault is total bank reseres*

•

"he %ed #andates #e#ber &o##er&ial banks tohold a &ertain !ra&tion o! their &he&kable de(osits

in resere !or#* "his !ra&tion is &alled the

required reserve ratio*

• "he di!!eren&e bet'een a bank+s total reseres and

its re1uired reseres is its excess reserves*


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"he Banking Syste# and "he

Money Creation Pro&ess• "he (ro&ess starts 'ith the %ed*

• "he %ed (rints the !unds, and Ja&k de(osits the!unds in his bank*

•

"he


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"he Banking Syste# Creates

Che&kable De(osits 9Money:


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"he Money ;)(ansion Pro&ess

• When the ?@000 that bankers &reated in ne'&he&kable a&&ounts is added to the ?5000 the %edinitially (rinted, 'e see that ?50,000 has beenadded to the #oney su((ly*

Maximum change in checkable deposits = (1/r ) x R

• Where r the re1uired resere ratio and R is the&hange in reseres resulting !ro# the originaline&tion o! !unds*

• 4n the !or#ula, 95r : is kno'n as the si#(lede(osit ratio*


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Assu#(tions in the Money

;)(ansion Pro&ess• All #onies 'ere de(osited in bank

&he&king a&&ounts*

• ;ery bank lent all its e)&ess reseres,leaing eery bank 'ith ero e)&essreseres*

•

Be&ause 'e assu#ed no &ash leakages andero e)&ess reseres, the &hange in&he&kable de(osits is the maximum (ossible&hange*


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Who Created What3

• "he #oney e)(ansion

(ro&ess has t'o #aor

(layers. the %ed, andthe Banking Syste#*

• "he #a)i#u# &hange

in bankable de(osits is

e1ual to. (1/r) x ER ,'here ;< is the e)&ess

reseres*


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"he Money Contra&tion Pro&ess

• "his (ro&ess is the Money Creation (ro&ess

in reerse


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7 8 A

• 4! a bank+s de(osits e1ual ?EF@ #illion and there1uired-resere ratio is @*EG, 'hat dollar a#ount#ust the bank hold in resere !or#3

• 4! the %ed &reates ?H00 #illion in ne' reseres,'hat is the #a)i#u# &hange in &he&kablede(osits that &an o&&ur i! the re1uired-resere ratiois 50G3

• Bank A has ?5*2 #illion in reseres and ?50#illion in de(osits* "he re1uired-resere ratio is50G* 4! Bank A loses ?200,000 in reseres, by'hat dollar a#ount is it resere de!i&ient3

Ch 12 Lo_money_and_banking

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