lec06_02 - ECON 4721H Money and Banking Lecture 06_02...

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Unformatted text preview: ECON 4721H Money and Banking Lecture 06_02 Satoshi Tanaka University of Minnesota November 2, 2011 Satoshi Tanaka ECON 4721H Money and Banking Lecture 06_02 Economics of Banking II Banks as Liquidity Providers Satoshi Tanaka ECON 4721H Money and Banking Lecture 06_02 Today's Question Direct investment in rm's project will take a long time. But, we can withdraw money from bank accounts anytime we want. Another reason for the existence of banks? Satoshi Tanaka ECON 4721H Money and Banking Lecture 06_02 Banks as Liquidity Providers 1 First, we'll consider the situation where money and capital coexist. 2 Investments in capital ( rm's project) take a longer time to yield returns. 3 Then, people do both holding money and investing in capital in the equilibrium. 4 Banks may improve this situation by reducing people's money holding. Satoshi Tanaka ECON 4721H Money and Banking Lecture 06_02 What Is liquidity? De nition As asset is liquid if it is exchanged easily, quickly, and at little cost. For example, a house is an investment. It can be exchanged, but not very easily and at great cost: have to pay real estate agents, lawyers, inspectors, etc. Stock in a company is an asset that can be exchanged very easily, but it has costs: stock brokers make a lot of money just buying stock from people who want to sell it and then selling it back to other people who want to buy it Satoshi Tanaka ECON 4721H Money and Banking Lecture 06_02 Money is Liquid Asset Money: easy to exchange, and little (transaction) cost.Money: easy to exchange, and little (transaction) cost....
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