Money Market Notes - The Money Market(Tables from A&B Ch 7...

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The Money Market (Tables from A&B Ch. 7) What is Money? Money is NOT about income or wealth. It is instead a: Medium of exchange Unit of account Store of value Monetary Aggregates M1: Currency, Traveler’s checks, demand deposits, other checkable deposits M2: M1+Savings deposits + individual Money Market Mutual Funds and Money Market Deposit Accounts + CDs and other “small-denomination” time deposits M3: M2 + “large-denomination” time deposits (i.e. jumbo CDs). MMMFs held by institutions, etc. Basically, when I say money I mean checking account balances. Fractional Reserve Banking and the Money Multiplier When we think of money creation, we tend to think of the Federal Reserve (since they decide how much “money base” to create) or the Treasury (since they print paper currency, but the amount is determined by the Fed). Actually, however, money is created by commercial banks because we have “fractional reserve banking.” How? The Fed determines: Money Base = currency in circulation + electronic reserves by commercial banks at the Fed. Suppose the Fed wants to increase the money supply. Here’s an example of how they might do it. First suppose that banks like to have about 15% of their deposits in reserve. Second, suppose that, just for simplicity, no currency is held by individuals.
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