Unit 4- Topic 1- Money

Three Uses of Money

1. Median of Exchange (barter)
2. Unit of Account (economic value)
3. Store of Value (money's value over time)

Types Of Money

1. Commodity Money (Gold Silver)
2. Representative Money (IOU's) ( ex. chicken could be representative money, but has no value.)
3. Fiat Money (money because the government says so)

Characteristics of Money

1. Durability (withstand physical wear and tear)
2. Portability (carry/transfer)
3. Divisibility (divided into small increments)
4. Uniformity (same/identical)
5. Acceptability (cash is accepted)

Money Supply

• M1 Money
• cash
• currency
• coins
• checkable/demand deposits (checking account)
• M2 Money
• encompasses M1 money + saving account
• M3 Money
• M2 + money market account + CD
• liquidity (easy to convert to cash)

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Balance Sheet- # summarizes the financial position of a bank at a certain time.

Liabilities VS. Assets 

Liabilities

• OWE
• 1. RR- Required Reserve- the % of demand deposits that must be held in the vault.
• 2. ER- Excess Reserve- source of new loans
• 3. Property (building/fixtures)- value of bank's property
• 4. Security and Bonds- bonds that are previously purchased by the banks new bonds sold to the bank by the federal reserve these bonds can be purchased from the bank and into cash and immediately becomes available as excess reserve.
• 5. Loans

Assets

• OWN
• Net Worth of Owner's Equality
• DD- Demand Deposit- cash deposit from the public

Liabilities =Assets 

RR+ER=DD

Liabilities                             Assets

RR (Required reserves)          DD (Demand/ Chekable Deposits) 

ER (Excess Reserves)

In order for money supply to increase, federal government must buy bonds, loans. To decrease money supply, they sell bonds or loans

• Federal Revenue Banking System: Federal government holds a fraction of the deposits back as a reserve in the bank. 

Fractional Reserve Banking System

• Banks hold fraction of deposit back as a reserve in a bank.
• Vote Cash- money that is kept back

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Money Market- It is the market where the fed and the user's of money interact thus determining the nominal interest rate.

• Money Demand (MD)- comes from households, firms, government, and the foreign sector 
• Money Supply (MS)- is determined by the federal reserve. 
• Transaction Demand: demand for money as a medium or exchange 
• Asset Demand: demand for money as a store of value.
• Depended upon interest rate

Total Money Demand

• MD Is downward sloping because at high interest rates, people are less inclined to hold money and more inclined to hold stocks and bonds. 
• Money supply is determined by the Fed because they have control over the supply of money 
• Money supply is vertical because it is independent of the interest rate 

Contractionary Monetary Policy: 

• interest rate increases 
• Money Supply (MS) shifts to the left
• Reserve ratio↑
• Discount rate↑
• SELL BONDS (less money) (MS ↓)

Expansionary Monetary Policy: 

• interest rate decreases
• MS shifts to the right
• Reserve ratio↓
• Discount rate ↓
• BUY BONDS (more money) (MS ↑

Open Market Operations: The government will either sell or buy bonds based on the situation.

Federal Funds Rate: Proportion of the money required to save as reserve. (bank to bank loan)

Discount Rate: money banks borrow from the FEDS

Monetary Multiplier: 1/RR 

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Loanable Funds 

the market where buyers and savers meet to exchange funds at the real interest rate both the demand supply for loan-able funds comes from households, firms, the government, and the foreign sector.

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