the money supply reserve_03

7/24/2019 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 Federal eserve !ystem "theFed#is the central #an% of the 0nited/tates.


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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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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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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 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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