Transcript Chapter 27
. Barter - is a type of trade in which goods or services are directly exchanged for other goods and/or services, without the use of money. Commodity money ◦ This money takes the form of a commodity with intrinsic value. Examples: precious metals: gold, silver, conch shells, barley, leather. It does not have intrinsic value, it has value because of decree. Examples: Coins, currency, check deposits. Standardized coinage Fiat money (fiduciary money) is used as money because of government decree. Electronic money Money is the set of assets in the economy that people use to buy goods and services from other people. Money has three functions in the economy: Medium of exchange Unit of account Store of value Currency is the paper bills and coins in the hands of the public. Demand deposits are balances in bank accounts that depositors can access on demand by using debit card or writing a check. M0: currency (notes and coins) in circulation and in bank vaults, plus reserves which commercial banks hold in their accounts with the central bank (minimum reserves). M0 is usually called the monetary base - the base from which other forms of are created - and is traditionally the most liquid measure of the money supply; M1: currency in circulation + checkable deposits (checking deposits, officially called demand deposits, and other deposits that work like checking deposits). M1 represents the assets that strictly conform to the definition of money: assets that can be used to pay for a good or service or to repay debt. M2: M1 + savings deposits, time deposits less than $100,000 and money market deposit accounts for individuals. M2 represents money and "close substitutes" for money. M2 is a key economic indicator used to forecast inflation. M3: M2 + large time deposits, institutional money-market funds, etc. The National Bank of Poland is the central bank of Poland. Its tasks are stipulated in the Constitution of the Republic of Poland, the Act on the National Bank of Poland and the Banking Act. The fundamental objective of the NBP's activity is to maintain price stability. Under the Monetary Policy Strategy beyond 2003 drawn up by the Monetary Policy Council, the objective of the NBP is to stabilise the inflation rate at the level of 2.5% with a permissible fluctuation band of +/- 1 percentage point. monetary policy, issue of currency, development of payment system, management of official reserves, education and information, services to the State Treasury. The Council was constituted on February 17, 1998. It is composed of: a Chairperson, this being the President of the NBP, nine members appointed in equal numbers by the President of the Republic of Poland, the Sejm and the Senate. Members of the Council are appointed for a term of six years. The Federal Reserve (Fed) serves as the nation’s central bank. It is designed to oversee the banking system. It regulates the quantity of money in the economy. It was created in 1914 to restore confidence in the nation’s banking system. The Structure of the Federal Reserve System: The are: primary elements in the Federal Reserve System 1) The Board of Governors 2) The Regional Federal Reserve Banks 3) The Federal Open Market Committee Regulates banks to ensure they follow federal laws intended to promote safe and sound banking practices. Acts as a banker’s bank, making loans to banks and as a lender of last resort. Conducts monetary policy by controlling the money supply. NBP has three tools in its monetary toolbox: Open-market operations Changing the reserve requirement Changing the discount rate The National Bank control of the money supply is not precise. The National Bank must wrestle with two problems that arise due to fractional-reserve banking. National Bank does not control the amount of money that households choose to hold as deposits in banks. National Bank does not control the amount of money that bankers choose to lend. Money creation is the process by which money is produced or issued. There are three different ways to create money: manufacturing a new monetary unit, such as paper currency or metal coins (money creation) loaning out a physical monetary unit multiple times through fractional-reserve lending (credit creation) buying of government securities or other financial instruments by central bank through Open market operations (electronic creation) Reserves are deposits that banks have received but have not loaned out. In a fractional reserve banking system, banks hold a fraction of the money deposited as reserves and lend out the rest. When a bank makes a loan from its reserves, the money supply increases. The money supply is affected by the amount deposited in banks and the amount that banks loan. The fraction of total deposits that a bank has to keep as reserves is called the reserve ratio. The Money Multiplier How much money is created in this economy? Suppose that reserve ratio=10% Original deposit First lending Second lending Third lending Total money supply =$ =$ =$ =$ = 100.00 90.00 [=0.9 x $100.00] 81.00 [=0.9 x $90.00] 72.90 [=0.9 x $81.00] $1,000 The money multiplier (MM) is the reciprocal of the reserve ratio: With a reserve The multiplier MM = 1/r requirement, R = 20% or 1/5, is 5. Problem of Bank Runs where: ◦ ◦ ◦ ◦ ◦ M1 C D g 1 MM M0 RC r g C – cash outside banking system D – deposits R – required reserves r – reserve ratio g - "Cash drain," the tendency of households to hold part of any additional money as cash http://www.mhhe.com/economics/mcconnell 15e/graphics/mcconnell15eco/common/dot hemath/complexmoneymultiplier.html www.wikipedia.org Czarny B. „Podstawy Ekonomii”, PWE, 2002 www.nbp.pl http://windward.hawaii.edu/facstaff/briggsp/Macroeconomics/macrolectures.htm