Unit IV- Money

Uses

- medium of exchange (barter or trade)

-unit of account, hives money its economic worth

-store of value

Types of Money

-Representative Money- paper money backed by a tangible product

-Commodity Money- gold and silver coins, gets its value form materials made

-Fiat Money- money because the government said it was

Characteristics of Money 

-Durability - how long is money good for 

-Portability - can carry it anywhere

-Divisibility - can be broken into smaller units

-Scarcity

-Acceptability

M1 Money

- consists of currency in circulation (paper and coins) 

- Checkable deposits- checking accounts, demand deposits (DD)

- Account for 75% of $ in circulation

M2 Money 

- 25 % of money

- Includes savings accounts

- money market accounts

- accounts held by banks outside the U.S

- adding M1 money as well

Formulas

-Assets= Liabilities + Net worth
-Reserve Ratio = (commercial banks required reserves/ commercial banks checkable deposit liabilities)

-Monetary Multiplier = 1 / (required reserve ratio)

- Maximum checkable deposit creation = excess reserves x monetary multiplier

-Single Bank

amount of money single bank cant create (loan out) = ER

AR-RR=ER

-Banking System

Can create money by a multiple of its initial ER

Deposit Multiplier = 1/RR

-System New $

Deposit Multiplier x Initial ER

Total change in the money supply as a result of the deposit

3 Important Issues

- Excess Reserves = actual reserves - required reserves
 -control of lending ability

-asset or liability to which bank

 

Options of Monetary Policy

 - Reserve Requirement- the % that is set by the FED of the minimum reserves that a bank must keep; decrease - expansionary monetary policy; increase - contractionary monetary policy'
- Discount Rate- the rate of interest that the FED charges for overnight loans to banks; decrease    - expansionary monetary policy; increase - contractionary monetary policy

- Federal Fund Rate- the rate that FDIC members charge each other for overnight loans; decrease    -  expansionary monetary policy; increase - contractionary monetary policy
- OMO (Open Market Operation):

Buy or sell securities (bonds) – “FED”

FED buys bonds - expand money supply (expansionary)
FED sells bonds - decreases money supply (contractionary)

Prime Rate- the interest rate that banks charge their most credit worthy borrowers