Unit 4

Uses of money:
-Medium of exchange: trade or batter with the money.
-Unit of account: established economic worth.
-Store of value: money holds it's value over a period of time.


Types of money:
-Commodity money: gets it's value from material it's made. Ex: gold and silver coins.
-Representative money: paper money back by something tangible.
-Fiat money: money because government says so.

Characteristics of money:
-durability: money lasts through many transaction.
-portability: transport money
-uniformity: even/uniform
-divisibility: divide your bill into smaller units
-scarcity: may not have money at the moment in time
-acceptability: it is acceptable anywhere

M1 money:
-currency: cash and coins
-checkable deposits or demand deposits (checking accounts)
-travelers check
-75% money in circulation
-more liquid- more easy to convert to cash

M2 money:
-savings account
-money market accounts
-CDs (certificate deposits)
-deposits held by banks outside the US.
-plus M1 money
-25% money in circulation
   
*Assets= Liabilities+ net worth
*Bank deposits are subject to a reserve requirement.

1. Excess Reserves= actual reserves- required reserves (assume 20% reserve requirement)

*bank creates money by lending excess reserve and destroy it by loan repayment. Purchasing bonds from the public also creates money.

Monetary policy:
-Influencing the economy through changes in reserves which influences the money supply and available credit.
-Controlled by Fed (Federal reserve bank)
- Fed = bankers bank

4 options if monetary policy:

1. Reserve requirement- Percent that is set by the fed of the minimum reserve a bank must have
2. Discount rate- banks barrow money from the federal reserve
(Last resort)
3. Federal fund rate- banks loan each other overnight funds
4. Omo (Open Market Operation)- Fed buys bonds > expands money supply
Fed sells bonds> decrease money supply
"Fed"= buy or sell secueities (bonds)

Single bank: amount of money single bank can create (loan out) = ER

AR-RR=ER

Banking system: can create money by a multiple of it's initial ER deposit multiplier = 1/RR = 1/.10 = 10

System new $: Deposit multiplier X initial ER

*Total change in the money supply as a result of the deposit. 

*If initial deposit is not new money, the total change in MS is only the new money created by the banking system.