chapter 13: money and banks mcgraw-hill/irwin copyright © 2009 by the mcgraw-hill companies, inc....
TRANSCRIPT
![Page 1: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/1.jpg)
Chapter 13:Chapter 13:Money and BanksMoney and Banks
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.
![Page 2: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/2.jpg)
13-2
The Uses of MoneyThe Uses of Money
oIf there were no money, we’d have to rely on barter:oBarter is the direct exchange of one good for
another, without the use of money.
LO-1
![Page 3: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/3.jpg)
13-3
The Uses of MoneyThe Uses of Money
oAnything that serves all of the following purposes can be thought of as money:
– Medium of exchange– Store of value– Standard of value
LO-1
![Page 4: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/4.jpg)
13-4
The Uses of MoneyThe Uses of Money
oThe three functions of money:oMedium of exchange–is accepted as
payment for goods and services (and debts).
oStore of value–can be held for future purchases.
oStandard of value–serves as a yardstick for measuring the prices of goods and services.
LO-1
![Page 5: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/5.jpg)
13-5
The Many Uses and Types of MoneyThe Many Uses and Types of Money
oMoney facilitates the market exchanges that permit specialization in production.
oIn the history of the U.S. many things have been used as money.
oThere were no U.S. dollars in the early days of Colonial America.
LO-1
![Page 6: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/6.jpg)
13-6
Many Types of MoneyMany Types of Money
o“Greenbacks” were issued in 1861 by the U.S. federal government.
oConfederate states also issued paper money to finance their side of the U.S. Civil War.
LO-1
![Page 7: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/7.jpg)
13-7
Cash versus MoneyCash versus Money
oThe concept of money includes more than dollar bills and coins.
oChecking accounts can and do perform the same market function as cash.
oMoney is anything generally accepted as a medium of exchange.
LO-1
![Page 8: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/8.jpg)
13-8
Transactions AccountsTransactions Accounts
oA transactions account is a bank account that permits direct payments to a third party (e.g., with a check).
oThe balance in your transactions account substitutes for cash and, therefore, is a form of money.
LO-1
![Page 9: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/9.jpg)
13-9
Basic Money SupplyBasic Money Supply
oThe basic money supply is typically referred to by the abbreviation M1.
oM1 is currency held by the public, plus balances in transactions accounts.
oCash is only part of the money supply; most money consists of balances in transactions accounts.
LO-2
![Page 10: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/10.jpg)
13-10
Basic Money SupplyBasic Money Supply
oCredit cards are another popular medium of exchange.
oCredit cards are not a form of money.
oThey are simply a payment service, not a store of value.
LO-2
![Page 11: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/11.jpg)
13-11
Composition of the Basic Money Supply (M1)Composition of the Basic Money Supply (M1)
oThe money supply (M1) includes:oCurrency in circulation
oTransaction-account balances
oTraveler’s checks
LO-2
![Page 12: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/12.jpg)
13-12
Near MoneyNear Money
oSavings accounts
oCertificates of deposit (CDs)
oMoney-market mutual funds
oThese represent additional measures of the money supply (M2, M3, etc.).
oWe will limit our discussion to M1, the basic money supply.
LO-2
![Page 13: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/13.jpg)
13-13
Aggregate DemandAggregate Demand
oHow much money people have may be one of the determinants of aggregate demand:oAggregate demand is the total quantity of
output demanded at alternative price levels in a given time period, ceteris paribus.
LO-2
![Page 14: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/14.jpg)
13-14
Creation of MoneyCreation of Money
oThe Bureau of Engraving and Printing and the U.S. Mint play only a minor role in creating money.
oMost of what we call money is not cash but bank balances.
LO-3
![Page 15: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/15.jpg)
13-15
Deposit CreationDeposit Creation
oIn making a loan, a bank effectively creates money, because transactions-account balances are counted as part of the money supply.
oBanks create transactions-account balances by making loans.
oDeposit creation–the creation of transactions deposits by bank lending.
LO-3
![Page 16: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/16.jpg)
13-16
A Monopoly BankA Monopoly Bank
oTo keep things simple, assume one bank in a town, and no one regulates bank behavior.
oYou deposit $100 from your piggy bank into the monopoly bank and receive a new checking account.
oWhen you deposit cash or coins in a bank, you are changing the composition of the money supply, not its size.
LO-3
![Page 17: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/17.jpg)
13-17
An Initial LoanAn Initial Loan
oThe monopoly bank loans $100 to Campus Radio.
oIt deposits $100 into Campus Radio’s checking account.
oThe loan is accomplished by a simple bookkeeping entry.
LO-3
![Page 18: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/18.jpg)
13-18
An Initial LoanAn Initial Loan
oMoney has been created because the checking account is considered to be money.
oTotal bank reserves have remained unchanged:oBank reserves are assets held by a bank to
fulfill its deposit obligations.
LO-3
![Page 19: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/19.jpg)
13-19
Using the LoanUsing the Loan
oThe money supply does not contract when Campus Radio spends the $100.
oThe ownership of the deposit changes.
LO-3
![Page 20: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/20.jpg)
13-20
Fractional ReservesFractional Reserves
oBank reserves are only a fraction of total transactions deposits.
oThe reserve ratio is the ratio of a bank’s reserves to its total transactions deposits:
LO-3
![Page 21: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/21.jpg)
13-21
Fractional ReservesFractional Reserves
oThe ability of a monopoly bank to hold fractional reserves results from two facts:
– People use checks for most transactions.– There is no other bank.
LO-3
![Page 22: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/22.jpg)
13-22
Reserve RequirementsReserve Requirements
oIf a bank could create money at will, it would have a lot of control over aggregate demand.
oIn reality, no private bank has that much power.
oThe power to create money resides in the banking system, not in any single bank.
LO-3
![Page 23: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/23.jpg)
13-23
Reserve RequirementsReserve Requirements
oThe Federal Reserve System requires banks to maintain some minimum reserve ratio.
oRequired reserves are the minimum amount of reserves a bank is required to hold by government regulation.
LO-3
![Page 24: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/24.jpg)
13-24
Reserve RequirementsReserve Requirements
oRequired reserves are equal to the required reserve ratio times transactions deposits:
oThe minimum reserve requirement directly limits deposit-creation possibilities.
LO-3
![Page 25: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/25.jpg)
13-25
Excess ReservesExcess Reserves
oExcess reserves are bank reserves in excess of required reserves:
LO-3
![Page 26: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/26.jpg)
13-26
Excess ReservesExcess Reserves
oThe ability of banks to make loans depends on access to excess reserves.
oSo long as a bank has excess reserves, it can make additional loans.
oIf a bank currently has $100 in reserves and is required to hold $75, it can lend out the $25 excess.
LO-3
![Page 27: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/27.jpg)
13-27
Excess ReservesExcess Reserves
LO-3
![Page 28: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/28.jpg)
13-28
A Multibank WorldA Multibank World
oIn reality there is more than one bank in town.
oThe key issue is not how much excess reserves any specific bank holds but how much excess reserves exist in the entire banking system.
LO-3
![Page 29: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/29.jpg)
13-29
The Money MultiplierThe Money Multiplier
oExcess reserves are the source of bank lending authority.
oThe cumulative amount of new loans is determined by the money multiplier.
LO-4
![Page 30: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/30.jpg)
13-30
The Money MultiplierThe Money Multiplier
oThe money multiplier is the number of deposit (loan) dollars that the banking system can create from $1 of excess reserves:
LO-4
![Page 31: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/31.jpg)
13-31
The Money Multiplier ProcessThe Money Multiplier Process
oAn initial deposit of $100 made at University Bank.
oUniversity Bank keeps $75 (75% of the $100 new deposit) on reserve and loans out $25 which is deposited in Bank Two.
oBank Two keeps 75% of the new deposit on reserve ($18.75) and loans out $6.25
LO-4
![Page 32: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/32.jpg)
13-32
The Money Multiplier ProcessThe Money Multiplier Process
oBank Three keeps 75% of the new deposit on reserve ($4.69) and loans out $1.56.
oThis process continues until all excess reserves have disappeared.
LO-4
![Page 33: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/33.jpg)
13-33
Limits to Deposit CreationLimits to Deposit Creation
oThe potential of the money multiplier to create loans is summarized by the equation:
LO-4
![Page 34: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/34.jpg)
13-34
Limits to Deposit CreationLimits to Deposit Creation
oIf the required reserve ratio = .75:
– The multiplier = 1.33
o If the banking system has $25 in excess reserves:– Potential deposit creation is $25 x 1.33 =
$33.25
LO-4
![Page 35: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/35.jpg)
13-35
Excess Reserves as Lending PowerExcess Reserves as Lending Power
oEach bank may lend an amount equal to its excess reserves and no more.
oThe entire banking system can increase the volume of loans by the amount of excess reserves multiplied by the money multiplier.
LO-4
![Page 36: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/36.jpg)
13-36
The Macro Role of BanksThe Macro Role of Banks
oBanks can create money.
oSince virtually all market transactions involve the use of money, banks must have some influence on macro outcomes.
LO-5
![Page 37: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/37.jpg)
13-37
Financing Aggregate DemandFinancing Aggregate Demand
oBanks perform two essential functions:oBanks transfer money from savers to
spenders by lending funds (reserves) held on deposit.
oThe banking system creates additional money by making loans in excess of total reserves.
LO-5
![Page 38: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/38.jpg)
13-38
Financing Aggregate DemandFinancing Aggregate Demand
oIncreases in the money supply tend to increase aggregate demand.
oAggregate demand declines when the money supply shrinks.
oThe banking system can create any desired level of money supply if allowed to expand or reduce loan activity at will.
LO-5
![Page 39: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/39.jpg)
13-39
Constraints on Money CreationConstraints on Money Creation
oThere are four major constraints on banks’ lending ability:oBank Deposits
oWilling Borrowers
oWilling Lenders
oGovernment Regulation
LO-5
![Page 40: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/40.jpg)
13-40
Bank DepositsBank Deposits
oBank reserves will be lower if people prefer to hold cash rather than make deposits in their transactions accounts.
LO-5
![Page 41: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/41.jpg)
13-41
Willing Borrowers and LendersWilling Borrowers and Lenders
oIf consumers, businesses, and governments don’t want to borrow, less deposits will be created.
oBanks may not be willing to satisfy credit demands, choosing instead to hold excess reserves.
LO-5
![Page 42: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/42.jpg)
13-42
Government RegulationGovernment Regulation
oThe Federal Reserve regulates bank lending practices.
LO-5
![Page 43: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/43.jpg)
13-43
Digital MoneyDigital Money
oThe most common forms of money cannot be used as a medium of exchange in electronic malls.
LO-5
![Page 44: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/44.jpg)
13-44
Credit CardsCredit Cards
oAlmost all Internet purchases are completed with a credit card.
oDependence on credit cards limits the potential of e-commerce because:oSecurity issues such as credit card number
theft.
oUse and sale of credit card databases by e-retailers for undisclosed purposes.
LO-5
![Page 45: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/45.jpg)
13-45
E-PaymentsE-Payments
oSome companies offer a quasi-banking service by storing purchasing power that consumers and e-retailers can access.
oConsumers must “deposit” e-cash with credit card advances.
LO-5
![Page 46: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/46.jpg)
13-46
Speed of SpendingSpeed of Spending
oConsumers still need cash and checking-account balances to pay for their e-purchases.
oVirtual malls allow consumers to spend money balances faster, thereby boosting aggregate demand.
LO-5
![Page 47: Chapter 13: Money and Banks McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved](https://reader035.vdocuments.mx/reader035/viewer/2022062221/56649e915503460f94b963d2/html5/thumbnails/47.jpg)
Money and Money and BanksBanks
End of Chapter 13End of Chapter 13
13-47