money

Money

• Definition• Uses

• Medium of exchange• Unit of Account (“numeràire”)• Store of value

• Measuring money (M1, M2, …)

Financial intermediaries

• Firms that manage the flow of financial funds from households and firms to other households and firms.• Commercial banks• S&L’s• Savings Banks and Credit Unions• Money Market Mutual Funds

Money and Banking

• Liabilities + Net worth = Assets• (deposits + owner’s equity = loans

made)• deposits = reserves + loans made• reserves = vault cash + FRB

account

Economic functions of financial intermediaries

• Create ‘liquidity’• Minimize the ‘cost of obtaining

funds’• Minimize the ‘cost of lending

funds’• Pooling risks in order to maximize

profits

Regulation

• Deposit insurance• FDIC, BIF, SAIF

• Balance sheet rules• capital requirements• reserve requirements• deposit rules• lending rules

Money “creation”

• The deposit-loan-reserve chain.

Short term AD - AS efffects

• Shifts AD right or left

Long term AD - AS effects

• Shift of the SAS right of left