MACRO PART 2 - MACRO PART 2 MOST LIQUID -worst store of...

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MACRO PART 2 MOST LIQUID LEAST LIQUID -worst store of value -best store of value Money stocks and bonds jewelry, art Collectibles, real estate -when people decide in what forms to hold their wealth, they have to balance the liquidity of each asset against the assets usefulness as a store of value 4. Money serves as a standard of deferred payment in borrowing and lending when repayment of debt is made using money There are two different kind of money: COMMODITY MONEY (good used as money, but still has value: gold and silver prisoners of war trading cigarettes) & FIAT MONEY (paper currency, doesn’t have to be exchange for gold and silver) -paper currency has little to no value unless it is used as money, so it is not commodity money, it is fiat money -a societies willingness to use paper currency as money makes that currency an acceptable medium of exchange M1: the narrowest definition of the money supply -the sum of currency (paper money and coins) in circulation (not held by banks of the gov), checking account deposits in banks, and holdings of traveler’s checks -march 28, 2011 M1 was $1,903,600,000,000 -while there are other definitions of the money supply we will use the M1 definition because it corresponds most closely to money as a medium of exchange *credit cards are not included in the money supply because they are considered a loan from the bank that issued the credit card => balances and checking accounts are included in the money supply, banks play an important role in increasing and decreasing the money supply… The US has a FRACTIONAL RESERVE BANKING SYSTEM (banks keep less than 100% of deposits as reserves) loan out the rest RESERVES: deposits that a bank keeps as cash REQUIRED RESERVES: legally required to hold based on checking account deposits REQUIRED RESERVE RATIO (RR): min fraction of deposits that banks must keep as reserves
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-the current US required reserve ratio is 0% of checking account deposits up to 10.7 mil dollars, 3% of checking accounts deposits between 10.7 mil and 58.8 mil, and 10% of checking account deposits above 58.8 mil dollars -most banks say 10% EXCESS RESERVES: reserves banks hold over and above the requirements -Banks accept deposits, hold some of the deposits as required reserves, and sometimes as excess reserves, and loan out the rest to households and firms -when borrowers make purchases with the loans, sellers deposit the funds in there banks, which hold some of those deposits as required reserves (also excess), and then loan the rest this process of banks making new loans increases the volume of checking account balances and therefore the money supply also increases EXAMPLE: the RR is .2 (20%) and banks do not hold excess reserves -1000$ is deposited into 1 st national bank, the bank keeps 200$ of the deposit in reserves, but they loan out the remaining 800$ -the burrower purchases a good with the 800$ -the seller deposits the 800$ into 2 nd bank -before 1 st national bank made the 800$ loan, the money supply consisted of $1000 worth of
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This note was uploaded on 07/04/2011 for the course ECON 302 taught by Professor Teague during the Spring '11 term at University of Iowa.

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MACRO PART 2 - MACRO PART 2 MOST LIQUID -worst store of...

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