the money supply reserve_03
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The Money Supply Reserve
System
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An Overview of Money
Moneyis anything thatis generally accepted as
a medium of exchange.
Money is not income, and money is notwealth. Money is:
a means of payment,
a store of value, and
a unit of account.
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!hat is Money"
Barteris the direct exchange of goods andservices for other goods and services.
A #arter system re$uires a doublecoincidence of wantsfor trade to ta%eplace. Money eliminates this pro#lem.
As a medium of exchange, or means of
payment, money is generally accepted #y#uyers and sellers as payment for goodsand services.
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!hat is Money"
As a unit of account, moneyis a standard that provides aconsistent way of $uotingprices.
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!hat is Money"
Money is easily porta#le,and easily exchanged forgoods at all times.
(he liquidity propertyof moneyma%es moneya good medium ofexchange as well as astore of value.
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*ommodity and +iat Monies
Commodity moniesare itemsused as money that also have
intrinsic value in some otheruse. old is one form ofcommodity money.
Fiat, or token, money ismoney that is intrinsicallyworthless.
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*ommodity and +iat Monies
Legal tenderis money that agovernment has re$uired to #eaccepted in settlement ofde#ts.
Currency debasementis thedecrease in the value of moneythat occurs when its supply isincreased rapidly.
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Measuring the /upply ofMoney in the 0nited /tates
M1, or transactions moneyismoney that can #e directlyused for transactions.
M1 currency held outside#an%s demand deposits traveler3s chec%s other
chec%a#le deposits M1 is a stoc% measureit is
measured at a point in timeon a specific day.
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Measuring the /upply ofMoney in the 0nited /tates
M2, or broad money, includesnear monies, or closesu#stitutes for transactions
money.
M2 M1 savings accounts money mar%et accounts othernear monies
(he main advantage of loo%ingat M2 instead of M1 is that M2is sometimes more sta#le.
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(he 6rivate 7an%ing /ystem
Financialintermediariesare#an%s and otherfinancial institutionsthat act as a lin%#etween those who
have money to lendand those who want to#orrow money.
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(he Modern 7an%ing /ystem
A #rief review of accounting:
Assets 8 lia#ilities 9et !orth, or
Assets ia#ilities 9et !orth
A #an%3s most important assets are itsloans. Other assets include cash on hand;or vault cash< and deposits with the +ed.
A #an%3s lia#ilities are its de#tswhat itowes. Depositsare de#ts owed to the#an%3s depositors.
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(he Modern 7an%ing /ystem
(he Federal eserve !ystem "theFed#is the central #an% of the 0nited/tates.
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(he Modern 7an%ing /ystem
eservesare the deposits that a#an% has at the +ederal =eserve
#an% plus its cash on hand.
(he required reserve ratiois thepercentage of its total deposits that a
#an% must %eep as reserves at the+ederal =eserve.
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(>Account for a (ypical 7an%
(he #alance sheet of a #an% must always#alance, so that the sum of assets;reserves and loans< e$uals the sum of
lia#ilities ;deposits and net worth
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(he *reation of Money
7an%s usually ma%e loans up to thepoint where they can no longer do so#ecause of the reserve re$uirementrestriction ;or up to the point wheretheir excess reserves are @ero
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(he Money Multiplier
(he money multiplier is the multiple #ywhich deposits can increase for everydollar increase in reserves.
n the example a#ove, the re$uired reserve ratiois 25B. Cach dollar increase in reserves couldcause an increase in deposits of D& when there isno lea%age out of the system. An additional D155of reserves result in additional deposits of D&55.
M o n e y m u l t i p l i e r =1
R e q u i r e d r e s e r v e r a t i o.0000Total
.
.
.
.
.
.
.201Bank !
"!Bank #
$0Bank 2
100Bank 1
%&positsSummary'
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(he ?iscount =ate
(he discount rateis the interestrate that #an%s pay to the +ed to#orrow from it.
7an% #orrowing from the +ed leadsto an increase in the money supply.(he higher the discount rate, the
higher the cost of #orrowing, and theless #orrowing #an%s will want to do.
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Open Mar%et Operations
$pen market operationsis thepurchase and sale #y the +ed ofgovernment securities in the openmar%etE a tool used to expand orcontract the amount of reserves inthe system and thus the money
supply. Open mar%et operations is #y far the
most significant tool of the +ed for
controlling the supply of money.
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Open Mar%et Operations
An open mar%etpurchaseofsecurities #y the +ed results in
an increasein reserves and anincreasein the supply ofmoney #y an amount e$ual tothe money multiplier times the
change in reserves.
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Open Mar%et Operations
An open mar%et saleofsecurities #y the +ed results in
a decreasein reserves and adecreasein the supply ofmoney #y an amount e$ual tothe money multiplier times the
change in reserves.
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Open Mar%et Operations
Open mar%et operations are the+ed3s preferred means of controlling
the money supply #ecause: they can #e used with some
precision,
are extremely flexi#le, and
are fairly predicta#le.
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