Money and the Banking System

Money and the Banking System - CHAPTER 16 MONEY AND THE...

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Unformatted text preview: CHAPTER 16 MONEY AND THE BANKING SYSTEM MONEY DEFINED “MONEY IS ANYTHING THAT IS REGULARLY USED IN ECONOMIC TRANSACTION OR EXCHANGES” PROPERTIES OF MONEY 0 Medium of exchange (no need for barter or double coincidence of wants 0 Unit of account 0 Store of value OUR MONEY *M1 is thebasic and most commonly used definition, of the “money supply”; M2 is a . broader. measure and-includes Savings and _ Load depOsits and Money Market Mutual , r Funds beside the M1 components WWW 2'2:va ':'I i," W’:‘fv WW7?! 'EaMe ”We? 3 COMPONENTS OF M], MARCH 2006 mam:m¢wxvma mmmmwmrr .zmmmm 'mm74:”.m7W«warmzanmafimrmmmmxfltmfikmmymfimzmwm mmmmmmmmgztmomvmfivmflmwr/Mx Currency held by the public $ 735 billion Demand deposits ' _ 323 billion Other checkable deposits 319 billion Traveler’s checks 7 billion Total of M1 1,384 billion 51¢: :.;;\-~. Myra. :;.5flw1~'l:lfmfi~yflh§ F 12-05“ : . Other checkable _ deposits 23% Currency 53% Demand deposits 23% COMMERCIAL BANKS IMPORTANT ROLE IN MONEY SUPPLY BALANCE SHEET ASSETS , LIABILITIES $200 reserves* $2,000 deposits $2000 loans $200 net worth** *reserves: not lent and bank is required by law as a fraction of their deposits ** net worth: Assets minus Liabilities RESERVES o If the reserve requirement is 10%, then the bank is required to hold 10% of deposits as reserves (vault cash and deposit with Federal Reserves System) 10% times $2,000 = $200 on balance sheet 0 Note: The $200 is thus called reguired reserves for our back. Since the balance sheet shows $200 reserves, the bank is “loaned up”, it can make no more loans 0 If the bank had $300 in reserves, we would say the bank has $100 in excess reserves. This would be available for the bank to make new loans 0 Concept of fractional reserve banking. CREATING MONEY 0 Text Example: Reserve ratio (percent required) equals 10%, so bank must hold 10% of all deposits as reserves.—>vault cash and deposit with Fed. 0 $1, 000 cash deposited 1n the First Bank of Hollywood ' ,-'51-,0005_Dep6s,'it3 ' I ofBurbarikr-r .p " Liabilities ‘ Rounds of deposits created: $1, 000 + $900 + $810 + $729 + $656.10 + = $10, 000 $100 Reserves $900 Loans Assets . $190 Reserves ‘ $810 Loans- \ , Assets» » $729 Loans Third-Bank bf Venice ' ‘ Liabilities ' i . $. 81 Reserves Liabilities \ Liabilities $900 Deposit V ‘ $810 Deposit Your original deposit of $1,000 has created checking account balances (demand deposits) Throughout the banking system $1,000 + $900 + $810 + $729+ $656.10 + etc .......... = $10,000. Another Way to Calculate the Rounds of Deposits ,, 0 Sum of deposits = initial deposit times l/required reserve ratio 0 = $1,000 X 1/.1 = $1,000 X 10 = $10,000 0 New Money actually $10,000 - $1,000 (initial deposit) = $9,000 0 Money Multiplier = 1/reserve ratio 0 Process works in the opposite way (reverse) 0 Taking cash out, lowers available reserves, lowers new loan and creation of new demand deposits IMPORTANT POINT THE COMMERCIAL BANKING SYSTEM PLAYS AN IMPORTANT ROLE IN THE INCREASES (AND DECREASE) IN THE SUPPLY OF MONEY. REMEMBER THAT MONEY (M1) INCLUDES DEMAND DEPOSITS OR CHECKING ACCOUNT BALANCES. THE FEDERAL RESERVE A BANK FOR BANKS What does the Fed Do? 0 Set up in 1913 to be a central bank for the country or to provide similar services to banks that banks provide us (loans and lender of last resort) 0 Supplies currency to economy '0 System of check collections and clearing 0 Hold reserves and regulates banks 0 Conducts MONETARY POLICY which is _ to manipulate the mOney supply to influence economic conditions as needed. , HOW IS THE FED STRUCTURED? Twelve Federal Reserve Districts Each which has a District Bank 0 Reflects concern over concentration of power 0 Also reflects the concentration of economic and financial power in 1913 which was in the east (LA?) NOTE: Both Hawaii-and Alaska”. ._‘ x , _ . are ‘in the Twelfth District? . OTHER FED FACTS 0 Board of Governors: In Washington DC, 7 members appointed to a14 years term and a Chairperson who serves a 4 year term. Appointed by the President and confirmed by the Senate. 0 Federal Open Market Committee: Makes basic decisions about monetary policy. This includes 12 individuals, the 7 Board of Governors, president of the New York Fed Bank, plus the presidents of 4 other regional banks (on a rotating'basis). - Commonly referred to as the FOMC . - I Federal Reserve Banks 4 , . Board of Governors (12 presidents) (7 members) . Federal Open Market committee (FOMC) ' > Board of Governors plus 5 Federal Reserve Bank presidents Decisions about monetary policy Ben Bernanke 0 Born in Augusta Ga., and grew up in Dillon SC . 0 Worked at a restaurant at South of The Boarder Ph.D. from MIT (SAT 1590) Beganteaching at Stanford Became tenured professor at Princeton Research interest in the Great Depression Appointed to the Fed Board as a member 2002 -2005 . 0 Chairman of the Presidents Council of Economic Advisors 2005-2006 ' 0 Chairman of Fed Board and member 2006 ...
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