Transcript Understanding Money and Banking

Bitcoin
Ted Talk
14 - 3
What Is Money?
Anything widely used
and freely accepted as
payment for goods and
services
14 - 4
The Functions of Money
Medium of Exchange
Store of Value
Unit of Account/
Measure of Value
14 - 5
What Is Money?
Portability
Divisibility
Durability
Recognizable
Relative scarcity
14 - 6
The Cost of Producing U.S. Coins
Golden Dollar
10.03 cents
Half Dollar
9.93 cents
Quarter
4.29 cents
Dime
1.88 cents
Nickel
3.13 cents
Penny
.81 cents
Source: http://www.usmint.gov/faqs/circulating_coins
14 - 7
Kinds of Money
Commodity – money with
intrinsic value
Representative –
convertible or
commodity-backed
money
Fiat – value derived from
official status,
acceptability
14 - 8
Just How Much Is a Ton of Money Worth?
The Time Value of Money
Dollar Bills
$908,000
Quarters
$40,000
Pennies
$3,632
Source: State of Michigan Office of Financial and Insurance Services,
www.cis.state.mi.us/ofic/consumer/kids/ton_money
14 - 9
The Money Supply
M1: Spendable
Currency
Demand deposits
M2: Spendable plus Convertible
(M1 + near money)
Time deposits
Money market mutual funds
Savings deposit
14 - 10
The Monetary Role of Banks
More than half of the
M1 is currency
The rest is demand
deposits
14 - 11
What Banks Do
•Financial Intermediary
•Bank Reserves
•T - Account
Assets & Liabilities
•Reserve Ratio
•Required Reserve Ratio
14 - 12
The Problem of Bank Runs
•Customer Deposits > Bank Reserves
•Why does this usually work?
•Bank Run
•Why?
•Bank Failure
14 - 13
Bank Regulation
•Deposit Insurance
•FDIC
•Capital Requirements
•Reserve Requirements
•The Discount Window
14 - 14
Money Supply Growth
5.4
5.0
Money Supply (trillions)
4.4
4.0
3.4
M-2
3.0
2.4
2.0
1.4
1.0
M-1
0.4
0
1964
1969
1974
1984
1984
1989
1994
2001
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Determining the Money Supply
14 - 16
How Banks Create Money
14 - 17
Reserves, Bank Deposits, and
the Money Multiplier
•“Leaks”
•Excess Reserves
•rr = reserve ratio
•Loan Expansion = Excess Reserves / rr
MM = 1/rr
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The Money Multiplier in Reality
•Monetary Base
•Money Multiplier
Each dollar of bank reserves backs
several dollars of bank deposits,
making the money supply larger
than the monetary base.
14 - 19
Assumes a reserve ration of 10%
Table 25.1 How Banks Create Money
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
14 - 20
Figure 25.3 Effect on the Money Supply of Turning Cash into a Checkable Deposit at First Street Bank
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
14 - 21
Insert Federal Reserve here
14 - 22
The Money Market
(Supply and Demand for Money)
23
Demand for Money
Transactions Demand –
medium of exchange
demand; directly related to
changes in nominal GDP
14 - 24
Demand for Money cont.
Asset Demand – store of
value demand; inversely
related to the interest rate
14 - 25
Demand for Money cont.
Total Money Demand –
transaction + asset directly
related to nominal GDP
14 - 26
The Demand for Money
At any given time, people demand a certain amount of
liquid assets (money) for everyday purchases
The Demand for money shows an inverse
relationship between nominal interest rates
and the quantity of money demanded
1. What happens to the quantity demanded of
money when interest rates increase?
Quantity demanded falls because individuals
would prefer to have interest earning assets instead
2. What happens to the quantity demanded when
interest rates decrease?
Quantity demanded increases. There is no incentive
to convert cash into interest earning assets
27
The Demand for Money
Inverse relationship between interest rates and
the quantity of money demanded
Nominal
Interest Rate
(ir)
20%
5%
2%
0
DMoney
Quantity of Money
(billions of dollars)
28
The Demand for Money
What happens if price level increase?
Money Demand Shifters
1.
Changes
in
price
level
Nominal
2. Changes in income
Interest Rate
3. Changes in taxation
(ir)
20%
that affects personal
investment
5%
2%
0
DMoney1
DMoney
Quantity of Money
(billions of dollars)
29
The Demand for Money
At any given time, people demand a certain amount of
liquid assets (money) for everyday purchases
The Demand for money shows an inverse
relationship between nominal interest rates
and the quantity of money demanded
1. What happens to the quantity demanded of
money when interest rates increase?
Quantity demanded falls because individuals
would prefer to have interest earning assets instead
2. What happens to the quantity demanded when
interest rates decrease?
Quantity demanded increases. There is no incentive
to convert cash into interest earning assets
30
The Supply for Money
The U.S. Money Supply is set by the Board of
Governors of the Federal Reserve System (FED)
Interest
Rate (ir)
20%
The FED is a nonpartisan
government office that sets and
adjusts the money supply to
adjust the economy
5%
This is called Monetary
Policy.
SMoney
2%
DMoney
200
Quantity of Money
(billions of dollars)
31
32
Why are there so many interest
rates?
33