Lecture21--Money

Lecture21--Money - MONEY 1. What it is 2. How it is...

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Unformatted text preview: MONEY 1. What it is 2. How it is measured 3. Why we hold it Money is: A medium of exchange s A standard of value s A standard of deferred payment s A store of value s Currency is fiat money issued by central banks of governments. The currency of the United States is issued by the Federal Reserve Bank: Currency is fiat money issued by central banks of governments. The currency of the United States is issued by the Federal Reserve Bank: Currency accounts for about 20% of the U.S. domestic money stock. The Money Stock: M1 and its Components s s s s Currency: 51% (An estimated 60% of this circulates abroad so currency circulating within the U.S. accounts for only 20 percent of M1) Checkable Deposits: 48.5% Travelers' Checks: 0.5% M1 is the narrowest definition of the money stock which includes only financial assets that can be used as a medium of exchange. As of Feb. 2009 , M1 = $1.58 trillion Checkable Deposits are a major component of M1 Checkable deposits are issued by depository institutions: Commercial banks, savings and loan associations, savings banks, and credit unions s Checkable deposits can be used to make payments through check writing or various means of electronic access to transfer deposits among accounts s "Near Money" includes liquid assets that are easily converted to checkable deposits at low cost. Near money includes money market accounts issued by banks and mutual fund companies, savings accounts, small denomination CDs and other near money s Adding near money to M1 = M2 s M2 is about 5.5 times as large as M1. s The money demand curve: s s s The "price" of holding money is the opportunity cost of doing so measured by the interest income foregone Money is held as a convenience to finance transactions and maintain liquidity for emergencies. Money is also held as an asset to store purchasing power Interest rate Money demand M1 Changes in money demand: s s s Money demand will change Interest rate when real GDP or the price level change Money demand will change in response to financial innovations the reduce the transaction cost of obtaining money to make payments Money demand also depends on expectations of the return on alternative assets such as stocks D2 D1 M* M1 Interest rates depend on the demand and supply of money Interest rate s s s Increases in the supply of money will lower interest rates. Decreases in the supply of money will increase interest rates. Changes in the demand for money will also affect interest rates. S1 S2 i1 i2 D1 M1 ...
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