Exam #1

What's a bank and how it functions in economy

A bank isn't just a place to 'store' your money. They take deposits given to them by their customers and create money, through loans, for the entire economy. from the 3% cash in the economy to the 97% of liabilities banks hold, through a multiplier system, these banks create money from deposits. Although, not technically with deposits. Loans are now created purely from the banks confidence that the lender will repay the loans. Additionally, bigger banks are more willing to commit to a loan because money passes through their network regularly. Smaller banks will be less likely to commit to a big loan due to this. the multiplier process is called the money multiplier, and technically speaking has a mathematical limit. According to this multiplier banks also cannot control over money supply and are only intermediaries. There is also a Reserve requirement needed in this process. so X% of 10,000 USD needs to be kept in reserve system of that bank.

Mechanisms or means by which money fulfills its roles in economy

*See Definition for what money is / function of money.* In the greater economy: Money functions as an investment, or functions as a way for people to invest, start their business or buy a house. These are aspects of life our society deems necessary, functional or needed for our economy/lives.

T-Accounts

An accounting device used to analyze transactions

Properties required of money

Confidence and belief. Other Properties: *1. Durability* --> it needs to last a long time, or at least be believed in to last. *2. Portability* --> you have to be able to carry it around with you, pay for stuff. *3. Divisibility* --> it has to be divisible, unlike a rock, gold etc. *4. Uniformity* --> money looks the same to us, that's how we know what its worth. we know what each bill or coin represents *5. Limited Supply* --> its not endless, but it also has the ability to 'grow' *6. Acceptability* --> WE have to accept it for what it is, believe in what it does. Without these characteristics, money wouldn't work the way it does. https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-9-functions-of-money

Fractional reserve banking and implications for supplying money

Fractional Banking Systems are subject to reserve requirements (in the money multiplier system): It's a banking system in which only a fraction of bank deposits are backed by actual 'cash'/money on hand that are available for withdrawal. Technically speaking, this is money that could have in theory been lent out to people to invest. Additionally, according to the money multiplier there is a finite amount of money able to create from deposits, but the reserve requirement makes sure there's even less. an increase in the reserve requirement, done by the fed through monetary policy, would take money out of the money supply.

M4

M1 + M2 + M3 AND *other deposits at UK banks or building societies*

M1

M1 is the money supply that includes physical currency and coin, demand deposits, travelers checks, other check-able deposits and negotiable order of withdrawal (NOW) accounts. *notes and coins in circulation, with non bank public plus sterling securities*

M2

M1 plus savings accounts, certificates of deposit, and other liquid assets All of M1 + less immediate (liquid) forms of money to include savings, money market mutual funds, and small denomination time deposits. M2 includes assets that are highly liquid but are not cash. M2 is a calculation of the money supply that includes all elements of M1 as well as "near money." M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds and other time deposits. These assets are less liquid than M1 and not as suitable as exchange mediums, but they can be quickly converted into cash or checking deposits. *M1 + sterling time deposits with up to 3 months notice, or up to 2 years fixed maturity*

What's the monetary base

MB = C + R C: Currency R: Reserves A monetary base is the total amount of a currency that is either in general circulation in the hands of the public or in the commercial bank deposits held in the central bank's reserves. https://www.investopedia.com/terms/m/monetarybase.asp

Functions of money

Money is often defined in terms of the three functions or services that it provides. Money serves as a medium of exchange, as a store of value, and as a unit of account. *1. Medium of exchange* Money's most important function is as a medium of exchange to facilitate transactions. Without money, all transactions would have to be conducted by barter, which involves direct *2. Store Value* In order to be a medium of exchange, money must hold its value over time; that is, it must be a store of value. *3. Unit of Account* Money also functions as a unit of account, providing a common measure of the value of goods and services being exchanged. https://www.cliffsnotes.com/study-guides/economics/money-and-banking/functions-of-money

Money

Simply, a tool to facilitate transaction, only those media that are readily accepted in exchange for goods, services for goods, services, and other assets needs to be considered. Anything that serves as a medium of exchange, a unit of account, and a store of value In the US: Money is used in transactions through 3 different mediums *1. Currency* --> paper money + coins *2. Demand deposits* --> non-interest bearing checking-account *3. Check-able deposits* --> NOW accounts (negotiable order of withdrawals) from: all banking institutions

Open-Market Operations (OMOs)

When the Federal Reserve buys or sells securities from its member banks, it's engaging in what's known as Open Market Operations. A tool of monetary policy, it involves the Fed's buying (or selling) of securities from (or to) commercial banks and the general public. https://www.thebalance.com/open-market-operations-3306121

M3

measure of the money supply Example. M2 plus deposits at institutions that are not banks such as savings and loan associations The broadest component of the money supply. Equal to M2 plus large time deposits. M3 is a measure of the money supply that includes M2 as well as large time deposits, institutional money market funds, short-term repurchase agreements and larger liquid assets. *m1 + m2 and re-purchasable agreements, money market fund units and debt securities up to 2 years.*

Kinds of money

*commodity money and fiat money* *Fiat Money:* money without intrinsic value that is used as money because of government decree money that has value because the government has ordered that it is an acceptable means to pay debts a medium of exchange whose value derives entirely from its official status as a means of payment *Commodity Money:* objects that have value in themselves and that are also used as money objects that have value in themselves and that are also used as money a good used as money that also has value independent of its use as money

What's a bank is and how it functions in economy

A bank isn't just a place to 'store' your money. They take deposits given to them by their customers and create money, through loans, for the entire economy. from the 3% cash in the economy to the 97% of liabilities banks hold, through a multiplier system, these banks create money from deposits. Although, not technically with deposits. Loans are now created purely from the banks confidence that the lender will repay the loans. Additionally, bigger banks are more willing to commit to a loan because money passes through their network regularly. Smaller banks will be less likely to commit to a big loan due to this. the multiplier process is called the money multiplier, and technically speaking has a mathematical limit. According to this multiplier banks also cannot control over money supply and are only intermediaries. There is also a Reserve requirement needed in this process. so X% of 10,000 USD needs to be kept in reserve system of that bank.

What is a central bank? Its functions?

A central bank is an independent national authority that conducts monetary policy, regulates banks, and provides financial services including economic research. In the US: Its goals are to stabilize the nation's currency, keep unemployment low, and prevent inflation (DUAL MANDATE) The national legislative body approves him or her. That keeps the central bank aligned with the nation's long-term policy goals. *Three things the FED does:* *First:* --> they set the reserve requirement, which is used to control how much banks are allowed to lend. *Second:* --> They use Open Market Operations: to buy and sell securities from member banks. *Thirdly:* --> They set targets on interest rates they charge their member banks. That guides rates for loans, mortgages, and bonds.

Shadow Banking System

A group of institutions that engage in lending activities, much like traditional banks, but do not accept deposits and therefore are not subject to the same regulations as traditional banks Shadow Banking Sector is a loose term, given to the financial sector that exists outside of the regulatory perimeter of banking, but mimics functions and structures of banks. Its not regulated because its non-depository. Shadow banking was critical in the build up of the demise of the credit boom. *By Definition: these banks are not a precise category. Financial intermediaries that take credit risk.*

Have functions of money been immutable over time, place and societies?

Immutable: unchanging over time or unable to be changed. Money, as we know it hasn't always existed. Prior to 'money', societies lived in barter systems, exchanges were made based on decision that in a situation both parties needed something that exchange would occur. Only occur if both parties wanted something. This exchange, to a certain extent is logical. But it isn't easy. This scenario isn't going to happen when only one party needs something. Yet that thing will still be needed. Money makes sense. That one party shall still gain from an exchange even if it wasn't mandatory for them to partake in that exchange. So therefore, to an extent yes. The functions of money are immutable, it's too logical not to be. At least in our society right now.

Fiat Money

Money without intrinsic value that is used as money because of government decree Money that has value because the government has ordered that it is an acceptable means to pay debts A medium of exchange whose value derives entirely from its official status as a means of payment *More Definitions:* A money that doesn't have intrinsic value, but has been decreed to be valuable.

Is describing a bank as a depository institution sufficient to convey what it does?

No, because you don't leave your money there to sit and go no where (even if that's what you think is happening). The money you, or I, deposit into our banks/savings accounts is taken by our financial institutions and used to give a loan to another person through indirect financing. This helps that person buy, create rebuild something, in term hopefully stimulating to the economy and that person will pay it back with interest. So you do get your money back, in theory its just being used while you're not touching it.

Commodity Money

Objects that have value in themselves and that are also used as money Objects that have value in themselves and that are also used as money A good used as money that also has value independent of its use as money *More Definitions:* An item, that is intrinsically valuable, something that would naturally make sense to trade for something else. At least in that culture. Are used as a medium of exchange because that item has value.

Quantitative Easing (QE)

Quantitative easing is a massive expansion of the open market operations of a central bank. It's used to stimulate the economy by making it easier for businesses to borrow money. The bank buys securities from its member banks to add liquidity to capital markets. This has the same effect as increasing the money supply. An open-market operation in which bonds are purchased by a central bank in order to increase the quantity of excess reserves held by commercial banks and thereby (hopefully) stimulate the economy by increasing the amount of lending undertaken by commercial banks https://www.thebalance.com/what-is-quantitative-easing-definition-and-explanation-3305881

Can there be too little money? Too much? Consequences of shortage or surfeit?

Shortage: Too little money; Could cause deflation, which is considerably more dangerous to the population than inflation. This is bad because your debts are nominally fixed previous to this deflation, and now have become proportionally harder to pay back. When Prices decrease, so do income and the burden of your debt increases. There's a population increase, in almost all states', so if money supply stays constant despite this there will be less money per person regardless and could create a shortage after some time. Surfeit: Too much money; Too much money in the economy doesn't cause inflation but it fosters it. Inflation at 2%-ish is great! If it reaches upwards of 50%, it's considered hyper-inflation and devalues the currency. It makes it so that to buy something simple, more money is needed. This isn't good, because you may have the same amount of money but worth less. but if prices are too stable, people may not invest or buy. They'll wait it out, but with money creation prices will rise. If money is being created, so is debt. Which, we have to pay back so too much money creation isn't good. When MS increased Interest rates go down, which in turn decreases savings and increases investment.

What is Money?

Simply, a tool to facilitate transaction, only those media that are readily accepted in exchange for goods, services for goods, services, and other assets needs to be considered. Anything that serves as a medium of exchange, a unit of account, and a store of value In the US: Money is used in transactions through 3 different mediums *1. Currency* --> paper money + coins *2. Demand deposits* --> non-interest bearing checking-account *3. Check-able deposits* --> NOW accounts (negotiable order of withdrawals) from: all banking institutions

Role of government in creation of the the stuff that is money

The government itself does not physically create money, the central bank does. Checks and balances. The government gives, or has given, money (what we consider money) its value. We believe in this money and therefore it is valuable. The Central Bank is technically separate from the government, but it is still a government institution. The head of the central bank is usually elected or nominated by a body of representatives from a country. And then the Central Bank creates legislation, monetary policy, that banks are upheld to. Additionally, technically the printing of money is also a governmental institution. But a senator, or the president, couldn't call up and tell them to print more money. The process of physically creating money, is something that does need to be taken seriously, as otherwise it could be faked.

What's the Money Supply

The money supply is the entire stock of currency and other liquid instruments circulating in a country's economy as of a particular time. The money supply can include cash, coins and balances held in checking and savings accounts https://www.investopedia.com/terms/m/moneysupply.asp

How much money is there and how do we measure or count it

There are two definitions of money: M1 and M2 money supply. M1 money supply includes those monies that are very liquid such as cash, checkable (demand) deposits, and traveler's checks M2 money supply is less liquid in nature and includes M1 plus savings and time deposits, certificates of deposits, and money market funds. Total M1: 2.988.2 Trillion Total M2: 11.820.3 Trillion M2 is used to measure how much money is in the economy. --> this is because it includes the more illiquid assets that aren't included in M1 but are still important. M2 also includes transfers of money, which M1 doesn't. Money Market Funds as well.

NOW Account

an interest-paying checking account; NOW: negotiable order of withdrawal --> you have to negotiate, or let the bank know, when you can/will withdraw the money in it.