lecture 13.pdf - Introduction to Macroeconomics Econ 201...

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NORTHWESTERN UNIVERSITY DAVID BERGER Introduction to Macroeconomics Econ 201
M O N E Y Lecture 13
We have money because markets work poorly without it eBay, Amazon, Netflix, Craig's List Reduce transactions costs! Money, financial system Demand Supply Supply plus transactions costs P Q DWL P from buyers P to sellers Q sold Loss to transactions costs Q w/o transaction s costs
Money! What is money? o A form of wealth § Low rate of return, but easy to spend ("liquid") o It's a useful technology for markets § MUCH better than barter
Types of money Commodity money: money that takes the form of a commodity with intrinsic value ( gold standard ) Fiat money: money without intrinsic value that is used as money because of government decree
Roles of Money What is money supposed to do? o Medium of Exchange § For spending § "Liquidity", wagon, beats barter o Store of Value § Money as wealth § Poor rate of return relative to stocks, bonds § But it is liquid! o Unit of Account § Important for economists! § How else would we measure GDP?
Bitcoin Crypto currency Is it a good type of money? ¡ Medium of exchange ¡ Store of value ¡ Unit of account?
Measures of Money Differing liquidities get differing measures Measure depends on the role money plays o "Cur" = Currency in circulation outside of banks o M1 = Cur + Demand Deposits § Demand deposits = Checking Accounts o M2 = M1 + Time Deposits § Time Deposits = Interest bearing savings accounts o Many more ways to measure money, but these are the main ones Where do these names, "Demand" and "Time" deposits come from? Just wait ....
Comparing growth rates - It's the Benjamins and Grants!
Interest rates represent the "time value of money" If we put $100 in the bank at a 6% interest rate, in a year it will grow to be $100*(1 + 6%) = $106 o Therefore there is an equivalence between: $100 now $106 in one year's time Similarly, at 6% interest rates, you could sell something will be worth $106 next year for $100 today. o Present value today of $106 in a year at i=6% = $106/(1.06) = $100
The Role of Banking Banks are intermediaries between savers and borrowers They are the intersection of supply and demand in the loanable funds market Like a supermarket between farmers and shoppers "Maturity transformation": SR deposits to LR loans
How do banks create money?
¡ How do banks make money?
Banks balance sheet To understand how banks create money we need to understand a little accounting What is always true (by definition): Net Worth = Assets – Liabilities or Assets = Liabilities + Net worth We will use this definition in the form of the bankers T
"Banker's T" Balance Sheet The “T” is an equal sign Assets (Owned) Liabilities (Owed) Net Worth Total Total
Operation of a Bank (Accounting) "Banker's T" Balance Sheet Assets (Owned) Liabilities (Owed) Cash in Bank's Vault Demand Deposits Deposits at Federal Reserve Time Deposits

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