Because at such low rates you would expect rates to

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Because at such low rates, you would expect rates to rise later and you may want to hold money now that rates are low. The demand curve for money is the sum of the three-demand curve u, the transaction, precaution and speculative demand for money. DETERMINATION OF THE INTEREST RATE Look at interest rates as the price of money, then r, like the price of anything else, is set by the forces of supply and demand. - The interest rate is determined by the demand for and the supply of money. - The supply of money is controlled by the Fed. At any given time, the Ms is fixed. There are literally scores of interest rates. People may receive between 2 to 5% on their savings and a lot more during times of inflation and may have to pay somewhere between 6 to 15% on a home mortgage. Large corporations with good credit ratings pay the prime rate, while smaller and less credit worthy firms might pay 1 or 2% above prime.
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“In banking it is axiomatic that the richest customers paid the least for borrowed money; highest interest rates were for the poor.” Arthur Hailey Interest rates may vary from day to day with consideration variation over the course of a year or two The Origins of Banking The Goldsmiths Modern Banking Like the early goldsmiths, today’s bankers don’t keep 100% reserve backing for their deposits. If a bank kept all its deposits in its vault, it would lose money from the day it opened. The whole idea of banking is to borrow cheap and lend clear. The more you lend, the more profits you make. Banks would like to keep about 2% of their deposits in the form of vault cash or reserve. U, as long as depositors maintain confidence in the banks or at least in the FDIC. However, they are required to keep up to 10%. The top 20 U.S commercial Banks (1992), 6 of the top 10 banks are located in NY (financial capital of the world) Tokyo Internationally: 8 of the top 10 banks are Japanese. Citicorp #25 and Chemical Bank #42 are the only American banks among the world’s top 50 banks. 20 years ago, Bank of America, Citicorp and Chase were the top 3 banks in the world. Reasons for the decline in Americans banking industry - Decline in world dominance/economy - America’s low saving rates Q M r MS D M
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- Growing competition in the industry - Growing concentration of banking assets among the 25 leading Japanese bank Bank Lending Banking is based on one simple principle Borrow at low r and lend out at higher r Read “welfare banks” Pg. 306 Financial Intermediaries They channel funds from savers to borrowers. Basically they repackage the flow of deposits, insurance premiums, pension contributions and other forms of savings into larger chunks or even more to large business borrowers It is possible to bypass the intermediaries – U.S Treasury/some large businesses do this by issuing bonds. The Treasury can also issue certificates, notes, bills, etc. THE CREATION AND DESTRUCTION OF MONEY The Creation of Money Money consists of checking deposits, check-like deposits and currency in the hands of the public. To create money, banks must increase either currency held by the public or checkable deposits. The way the banks do this is by making Loans. Whenever a loan is made, money is created.
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  • Spring '10
  • SM
  • Fed, MONEY Commodity money, MONEY SUPPLY Money

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