Chapter 13: Money and Banking
Money-market deposit account (MMDA)
An interest-bearing account through which banks and thrifts pool individual deposits to buy a variety of interest-bearing short-term securities.
Money Market Mutual Funds (MMMF)
Funds offered by a mutual fund company. Deposits can redeem shares here by making a phone call, using the internet, or writing a check for more than $500.
Determinant of Da
Interest rates
Relationship between Da and interest rates? Why?
Inverse. Because if the interest rates / opportunity cost to not Da increase, people want to hold $ as assets, not as liquid money.
Why are Currency and checkable deposits owned by the U.S. Treasury (gov't) and Fed. Reserve Banks, commercial banks, and other financial institutions are excluded from M1 and other monetary supply measures? (2)
It avoids double counting and allows for better assessment of money available to firms and households for spending.
Money definition M2
M1 + several near monies
What determines the economy's supply-of-money-curve
M1 in relation to the nation's real interest rate
Money Definition M3
M2 + Large time deposits ($100,000+)
Quasi-Public Banks
They are the 12 Federal Banks, blend private & public control. Commercial banks buy stocks in the Fed. Reserve Bank in their District. Each bank is owned by private commercial banks, but, the Board of Governors set the policies pursued by the Fed. Res. Banks.
Why is the Fed. independent from he gov?
To liberate it from political pressure so that it can effectively control the money supply. Studies show that independent central banks have less inflation than countries w/ little to no central bank independence.
Thrift Institutions are regulated by agencies like the ____ _____ ____ ____ ____, but are subject to ____ ____ by the Federal Reserve System.
Treasury Department's Office of Thrift Supervision; monetary control.
Why is *NOMINAL* GDP, not REAL GDP the main determinant of Dt?
Use nominal GDP because the amount of money households/firms want for transactions is dependent on inflation/deflation or level or real output.
Why are checkable deposits a large component of the M1 supply? (2)
A person must endorse a check, unlike paper money; it's more convenient (for large amounts).
Credit Unions
Accept deposits from and lend to "members".
How is Dm (total money demanded) found?
Add Da + Dt
The gov't's money authority attempts to provide the amount of money needed for the particular volume of business activity that will promote...... (3)
full employment, price-level stability, and economic growth.
Time deposits
money in these deposits become available at their maturity. Take out $ after time runs out without penalty. Incentive: financial institutions pay higher interest rates than MMDAs.
How is the supply of money represented graphically? Why?
vertically. Because monetary authorities provide the economy from some money stock like M1.
What determines the value of money?
(1) Acceptability, (2) Legal tender, (3) Relative Scarcity (supply & demand)
What does the stabilization of money's value require (2)
(1) Appropriate fiscal policy and (2) intelligent management/regulation of money supply (Monetary policy)
What are the functions of the Fed.? (7)
(1) Issue currency, (2) Setting reserve requirements and holding reserves, (3) Lending money to banks and thrifts (4) check collection, (5) Fiscal agent - provide financial services for gov't (6) supervise banks - asses bank profitability, fraud, etc. (7) control money supply - regulate $, influence interest rates.
Functions of money (3)
(1) medium of exchange, (2) unit of account (measure relative worth of goods/services/etc), (3) store of value
Why is paper money/token money a good store of value (2)
(1) most liquidable of all assets (2) Without inflation, it's risk-free
The economy's demand for money depends on ________ + ________
(1) the total dollar volume of transactions in any period of time + (2) the amount of $ saved.
Why do people save some of their wealth as money?
(1) to make purchases and (2) to hold it as an asset.
What is the main determinant for Dt
**NOMINAL** GDP.
Recent developments in money and banking (5)
1. Decline of banks and thrifts; 2. consolidation among banks and thrifts; 3. convergence of services provided by financial institutions; 4. globalization of financial markets; 5. electronic transactions.
What caused recent developments in money and banking? (3)
1. corruption, 2. banking globalization, 3. tech advances.
Why is managing the money supply better than linking it to a commodity?
Because the supply of the commodity may arbitrarily/erratically change --> not stable.
Federal Reserve Bank
Blend private and public control, 12 of them collectively serve as the nation's "central bank". 12 banks controlled by Fed's Board's of Governors. Their job is to implement the basic policy of the Board of Governors. The NY Bank conducts most of the Fed's open-market operations.
Large time deposits
Can be sold (liquidated), but risk losses. Used for saving, not "money".
Institutions that offer checkable deposits (2)
Commercial banks and thrift institutions
With _____demand, ______determines the value of the monetary unit.
Constant; supply
Why aren't credit cards and debit cards part of money supply?
Credit cards are convenient means of obtaining a short-term loan from the financial institution that issued the card. You pay this loan back during monthly payments from your checking accounts; credit cards only defer or postpone the payment for a short period. IF you count credit card purchases, then you'd be double counting because you'd count the credit card purchase at the time as (1), then at the end of the month, you'd count that purchase again when you reimburse the financial institution with your checking account.
Currency and checkable deposits owned by the ___________ and ___________, ______________, and other _______________ are excluded from M1 and other monetary supply measures.
Currency and checkable deposits owned by the U.S. Treasury (gov't) and Fed. Reserve Banks, commercial banks, and other financial institutions are excluded from M1 and other monetary supply measures.
Mathematical expression of dollar value & CPI/Cost of Living
D = 1/P(expressed as index #)
What are the three types of "near monies"?
Savings deposits, small (less than $100,000) time deposits, and money market mutual funds.
What is paper money?
The circulating debt of Federal Reserve Banks.
Federal Reserve Notes
The form of all paper currency in the U.S. It's issued by the Federal Reserve System with the authority of Congress.
What backs the money supply?
The gov'ts ability to keep the money value stable.
What happens if the money supply declines?
The quantity of Dm is larger than Sm, which causes people to make up for this money shortage by selling financial assets. This increases the supply of bonds relative to demand, which results in a decline of bond prices and higher interest rates. This higher interest rate increases the opportunity cost of holding money, thus decreasing the amount of money households want to hold as $.
What can hyperinflation / runaway inflation cause?
The value of the monetary unit may decline (depreciate), thus resulting in less acceptability. People may resort to barter or the adoption of a more stable medium like the dollar.
What happens if the money supply increases?
There is a surplus, which makes people get rid of money by buying more bonds, which increases he demand for bods, which increases bond prices and results in lower interest rates.
Savings account
a checkable account
Federal Open Market Committee (FOME)
aids the Board of Governors in Conducting Monetary Policy. Comprised of: 1. 7 Board of Governor Members; 2. President of the NY Fed. Reserve Bank; 3. Four of the other Fed. Reserve Bank Presidents, rotate on 1-yr basis. Meets to discuss purchase & sale of gov't securities in open market to maintain/change key interest rates.
Token money
all coins in circulation in the U.S. The intrinsic value (of the metal) is less than the face value of the coin.
"Near Monies"
certain highly liquid financial assets that don't directly/fully function as a medium of exchange but can be converted into currency/checkable deposits. There are three types.
The use of banks and thrifts [increasing/decreasing], the use of pensions and insurance companies are [increasing/decreasing].
decreasing ; increasing
To ensure that banks honor the debt they owe to people, there is _____ ______ _____
heavy gov't regulation
Fiat money
money that is money because the gov't said so
Money Definition of M1
narrowest definition of the U.S. money supply, consists of currency (coins and paper money) in public hands and checkable deposits.
If the nominal GDP increases....
people want to hold more money for transactions, which shifts Dm to the right.
There is a ________ relationship between the general price level and the purchasing power of the dollar.
reciprocal
Thrift institutions
savings and loan associations, mutual savings banks, and credit unions that supplement commercial banks. Accept the deposits of households and businesses and then use the funds to finance housing mortgages and provide other loans.
Federal Reserve System
the "monetary authorities", i.e. the members of the Fed. Control the lending activities of the nation's banks and thrift institutions.
Purchasing power of money
the amount of goods and services a unit of money will buy
Board of Governors
the central authority of the U.S. money and banking system. The U.S. Pres, w/ Senate conformation, appoint 7 members, w/ 14 yr long terms.
Money market
the combined demand for money and supply for money, which determines the equilibrium interest rate.
Checkable deposits
the debts of commercial banks and savings institutions.
Transactions demanded
the demand for money for purchasing goods and services.
Asset demanded
the money that people want to hold/save. Done through holding financial assets through corporate stocks, private/gov't bonds bonds, etc.
Commercial banks
the primary depository institutions. They allow consumers to write checks in any amount on the funds they have deposited. Keeps money safe until demanded by checks. Provide financial capital to businesses and finance consumer purchases of automobiles and other durable goods.
Graphically, what does Dm represent?
the total amount of $ people want to hold at each possible interest rate.