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UNIT 4 - Money (Market)

Uses of Money
*medium of exchange
*unit of account (economic value)
*store of value
Types of Money
*Commodity Money (ex: gold, silver)
*Representative Money (IOU)
*Fiat Money
-money b/c gov't said so
Characteristics of Money
*Durability - money is able to withstand physical wear and tear (more quality than paper)
*Portability- money is easily transferable
*Divisibility- money can easily broken down
*Uniformity - standardized currency
*Scarcity - only available in limited qualities
*Acceptability - money is exchange for goods and services
Money Supply
*M1 money (75%)
-cash, coins, currency, travelers' check, demand or checkable deposits (CD, major component of M1 money)
*M2 money
-M1 money + savings account
*M3 money
-M2 money + money market accts + CD's (certificate of deposit)
Liquidity - easy to convert to cash (M1 and M2)
Balance Sheet
-summarizes financial position of the bank at a certain time
(T account - T chart)
Assets
(own)
 Liabilities
(owe)
 1. RR (required reserves)
 DD (checking
 CD    accts.)
 2. ER
(excess reserves)
 Net worth or owner's equity
3. Bank Property 
 _______
 4. Securities and Bonds
 _______
 5. Loans
 _______
Money Market- where Fed and the users of money interact, thus determining the ir (nominal interest rate)

Money Demand
   *downward sloping b/c at high IR, people are less inclined to hold $ and more inclined to hold  stocks and bond
-comes from
>>Asset Demand- demand for $ as a store of value
Money Supply is determined by the Fed, b/c Fed has a monopoly over the supply of money and for this reason the MS curve is vertical
  *Vertical - independent of IR
Money Multiplier (MM): 1/RR
New Money: Initial loan X MM

Money Creation Process
1) $1000 in cash deposited into a checking account
   (No immediate change in MS)
2) $1000 FED purchase of bonds from public | deposited into a checking account
    (immediate ↑ MS of $1000)
* For #'s 1 and 2: 
 Assets
 Liabilities
 Reserves  $1000
 DD $1000
Required Reserves = $100 (.10 x $1000 deposit)
Single Bank: Amount of money single bank can create (loan out) = ER
Actual Reserves - Required Reserves = Excess Reserves
        $1000 - $100 = $900 in ER
Banking System: can create money by a multiple of its initial excess reserves
MM = 1/RR = 1/.10 = 10
        System New $ = Deposit Multiplier x Initial Excess Reserves
                                        10                     x       $900  = $9000
Total change in money supply as a result of the deposit
             (for #2)  initial deposit (if new) + Banking system created money = Total change in MS   
                                     $1000                 +    $9000      = $10,000

An Explanation

 
 
 
 

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