Unit 4 - Money

Money

• Uses of Money
1. Medium of exchange
2. Unit of account
3. Store of value
• Types of Money
1. Commodity money
• products
• Ex: gold, silver
2. Representative money
• Ex: IOU's
3. Fiat money
• has value because the government says so
• Characteristics of Money
1. Durability
2. Portability
3. Visibility
4. Uniformity
5. Scarcity
6. Acceptability
• Money Supply
• M1 Money
• cash, coins, currency, travelers checks, demand or checkable deposits
• 75%
• largest component is checkable or demandable deposits - checking accounts
• M2 Money
• M1 money + savings account
• M3 Money
• M2 money + the money market account + CD's (certificate of deposit)
• Liquidity
• easy to convert to cash

Banking System

• Balance Sheet
• summarizes the financial position of the bank at a certain time

Assets (own)	Liabilities (owe)
1.      RR (required reserves)            2.      ER (excess reserves)            3.      Bank property            4.      Securities or bonds            5.      Loans	DD (checking) CD (checking) Net worth or owner’s equity

• RR + ER = DD
• Fractional reserve banking system
• the banks have to keep a fraction of the total money supply that is held in reserve as currency (the bank cannot loan out everything)

Money Market

• it is the market where the Fed and the user of money interact, thus determining the nominal interest rates
• money demand comes from households, firms, the government, and the foreign sector
• the money supply (MS) is determined only by the Federal Reserve Bank
• Types of Money Demand:
1. Transaction Demand - demand for money as a medium of exchange
2. Asset Demand - demand for money as a store of value; it is dependent upon the interest rate
• Money Demand
• downward sloping because at high interest rates, people are less inclined to hold money and more inclined to hold stocks and bonds
• Money Supply
• it is determined by the Fed because the Fed has a monopoly over money supply
• this is why money supply has a vertical curve
• it is also vertical because it is independent of the interest rate

Expansionary Monetary Policy	Contractionary Monetary Policy
·         MS will shift to right          ·         i (↓)          ·         discount rate (↓)          ·         reserve ratio (↓)          ·         buy bonds (more $)          ·         MS increases	·         MS will shift to left          ·         i (↑)          ·         discount rate (↑)          ·         reserve ratio (↑)          ·         sell bonds (less $)          ·         MS decreases

Loanable Funds

• the market where buyers and savers meet to exchange funds at the real interest rate
• both the demand and the supply for loanable funds comes from households, firms, the government, and the foreign sector