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Money

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anything generally accepted in exchange for goods and services

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Functions of money (4)

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1.Medium of exchange 2.Unit of account 3, Store of value 4,means of deffered payment.

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Money as a medium of exchange(Primary function)

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"Medium of exchange"-facilitate transactions and lower transaction costs ppl also BARTER as a medium of exchange

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Barter

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-direct exchange of goods and services

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Money as a unit of account

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"yard stick" providing units to match up

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Money as a store of value

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can be saved/stored and out away -money "paper" is easier to store than whaet

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money as a means of differed payment

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the attribute of money that makes it easier to borrow an pay loans

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currency

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coins/paper created to facilitate trade of goods and services and payment of debts

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currency as LEGAL TENDER

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coins and paper officially declared to be acceptable for settlement of debts "in gov eyes" legal is FLAT MONEY

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FLAT MONEY

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means of exchange established by government

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Demand deposits and other checkable accounts

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demand deposits- balances in bank accounts that depositers can access on demand transaction deposits- deposites that can be easily converted to currency or used to buy goods and services directly travelors checks- transaction instruments easiler converted into currency

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Why demand deposits over paper?

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-ease an safety of transactions -lower transaction costs -transaction records

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_ease and safety

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paper money is easily stolen an used, checks need identification

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lower transaction costs

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cheaper to use checks but bc of time constrictions, ppll still prefer cash fro small purchases

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Credit and debit cards (not money)

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credit- like borrowing debit- direct access of debit accounts

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nontransaction deposites

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funds that cannot be used for DIRECT payment - but must be CONVERTED into currency for use 2 types 1.saving accounts' 2.time deposites

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Near money assets

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nontransaction deposits that are not money but can be quickly CONVERTED into money

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Money mutual market funds

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interest earnings accounts provided by brokers who pool funds into such investments as treasury bills. considered to be NEAR MONEY

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stocks and bonds

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not considered money, bc takes a few days to receive payment for stock, - cannot turn into cash as quick as savings account value of stock fluctuates over time

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liquidity

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the ease with which one can be converted into another asset,good,or service assets are less liquid than stocks

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M1

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narrowest definition of money includes CURRENTCY.CHECKABLE DEPOSITES.and TRAVELORS CHECKS

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M2

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a broader definition of money that includes M1 plus saving deposits, time deposits, and noninstitutionalized money market mutual fund shares.

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How was money backed

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used to be made out of precious medals. "gold standard"- defining dollar as equivalent to gold

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Grahms law

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when two forms of money are available ppl will spend less valuable and save more valuable

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what backs our money now

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faith confidence that it will be generally accepted

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Commercial banks

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financial institutions organized to handle everyday financial transactions of buisnesses and households thro demand deposits account and savings accounts and by making short term commercial n consumer loans

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Two other important financial institutions

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savings and loan associations and credit union

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savings and loan association

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financial institution that has demand deposits n savngs of members and makes loans especially home and mortgage loans

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credit unuons

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a credit unuion is a financial coorportion made up of depositers with common affiliation:such as the same employers

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Functions of financial unions

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-pay monthly bills automatically fro individuals -rent safe deposit boxes -depositores for savings and liquid assets used for transaction -make loans

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How do banks create money

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doesn't give ppl cash rather puts 1000 on their depository account creating a new checkable deposit money -BANKS MAKE PROFIT OFF INTEREST RATES

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Reserve requirements

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bc banks make money with more loans they could make endless lones..what stops them? that's right reserve requirements "holdings of assets at the bank as mandated by the fed."

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Fractional Reserve System

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system that requires banks to hold reserves equal to a named fraction of their checkable deposits

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Secondary reserves

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banks keep some money here...highly liquid high interest paying.

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balance sheet

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bank record that indicates balance of assets n libilitys plus capital

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assets

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items of value that a bank owns largest asset fro most banks is loans

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liabilitys -

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financial obligations banks have to ppl

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capital stock

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for a bank to be good what it owns must exceed what it owes

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15-1-What Is Money? 1. True or False: Using money is better than barter.

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True. Barter is inefficient compared to money because a person may have to make several trades before receiving something that is truly wanted.

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2. Why do virtually all societies create something to function as money?

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Having some good function as money lowers transaction costs, allowing increasing specialization and exchange to create increasing wealth for a society. That increase in wealth made possible by using money is why virtually all societies create something to function as money.

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15-2-Measuring Money 3. True or False: Our money is currently backed by gold.

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False. The United States went off the gold standard in 1933. Now the true backing is our faith that others will accept it from us in exchange for goods and services.

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4. Which one of each of the following pairs of assets is most liquid?

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a. Microsoft stock or a traveler's check—a traveler's check b. a 30-year bond or a six-month Treasury bill—a six-month Treasury bill c. a certificate of deposit or a demand deposit—a demand deposit d. a savings account or 10 acres of real estate—a savings account

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5. True or False: Credit cards are a form of money.

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False. Credit cards are actually guaranteed loans available on demand to users, which can be activated by consumers. Credit cards are convenient substitutes for making transactions directly with money, that is, they are substitutes for the use of money in exchange.

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15-3-How Banks Create Money 7. If a bank had reserves of $30,000 and demand deposits of $200,000 (and no other deposits), how much could it lend out if it faced a required reserve ratio of: a. 10 percent?

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—$10,000

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b. 15 percent?

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—Zero. The bank has zero excess reserves.

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c. 20 percent?

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—Zero. The bank has insufficient reserves and must call in $5,000 in loans to meet its reserve requirement.

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8. Is a demand deposit an asset or a liability?

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A demand deposit is an asset for its owner but a liability for the bank at which the account is kept.

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15-4-The Money Multiplier 10. Calculate the magnitude of the money multiplier if banks were to hold 100 percent of deposits in reserve.

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The value of the money multiplier would equal one.

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11. True or False: The supply of money and the volume of bank loans both increase or decrease at the same time.

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True. The supply of money and the volume of bank loans both increase or decrease at the same time because issuing new bank loans adds to the money supply, while calling in existing bank loans reduces the money supply.

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15-5-The Collapse of America's Banking System, 1920-1933 12. How did the combination of increased holding of excess reserves by banks and currency by the public lead to bank failures in the 1930s?

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The public's desire for increased currency holdings, caused largely by the fear of bank failures, also forced banks to sharply increase excess reserves and reduce lending, together resulting in a sharp fall in the money stock. Despite substantial excess reserves, however, bank runs led to the failure of even many conservatively run banks.

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13. What are the four reasons cited in the text for the collapse of the U.S. banking system in this period?

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The cited reasons include: (1) the large number of small banks, which were more at risk from bank runs; (2) governmental attempts to stem the distress in the banking industry that were both weak and too late; (3) the absence of deposit insurance, which would have bolstered consumer confidence; and (4) fear that the economy was in a continuous downward cycle, so there was little basis for optimism that bank loans would be safely repaid.

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14. True or false: The creation of the FDIC increased bank stability.

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True. The FDIC has largely eliminated destabilizing bank runs.

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Additional Questions 1. Explain the difficulties that an economics professor might face in purchasing a new car under a barter system.

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Answer: An economics professor may find it difficult to locate a trading partner willing to listen to economics lectures or receive economic advice in exchange for a new car. There may be significant search costs involved in locating such a trading partner. The professor might have to provide lectures in exchange for goods that are not desired, hoping ultimately, after perhaps a series of trades, to be able to obtain a new car.

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2. An alternative version of Gresham's Law is that "Bad money drives out good money." Why is it true that, in choosing between different currencies to transact in, good money drives out bad money?

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Answer: Gresham's law refers back to different coins of precious metal money that must be treated as having the same official value, even though they had different amounts of precious metals. In that case, because you would want to keep the more valuable coin and use the less valuable coin in exchange, bad money would drive out good money in exchange. However, in choosing between different currencies with which to conduct transactions, people would prefer the currency that was a more reliable store of value, so for those choices, good money drives out bad money.

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Note: Problems 3-6 could alternately be combined for a short pop quiz, be used as a take-home assignment, or be used as an in-class exercise.

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3. Indicate whether each of the following belongs on the asset or liability side of a bank's balance sheet: a. loans b. holdings of government securities c. demand deposits d. vault cash e. deposits at the Fed f. bank buildings g. certificates of deposit

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4. What would each of the following changes do to M1 and M2? (Answers are in bold.)

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Change M1 M2 An increase in currency in circulation increase increase A decrease in demand deposits decrease decrease An increase in savings deposits no change increase An increase in credit card balances no change no change A conversion of savings account balances into checking account balances increase no change A conversion of savings account balances into time account balances no change no change A conversion of checking account balances into money market mutual funds decrease no change

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5. What would the money multiplier be if the required reserve ratio were:

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a. 5 percent? b. 10 percent? c. 20 percent? d. 25 percent? e. 50 percent?

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6. Assume there was a new $100,000 deposit into a checking account at a bank. What would be the resulting excess reserves created by that deposit if banks faced a reserve requirement of:

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a. 10 percent? b. 20 percent? c. 25 percent? d. 50 percent?

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