E B R E O , M A N T O , M A RT I N E Z , PA B A L AT E , S A L A Z A R , S T O . D O M I N G O , YA P – L 3 A WHAT IS MONEY? • It is a commodity or token that is generally accepted as a means of payment. It can be an actual commodity, such as a bar of silver or gold. It might also be a token such as a quarter or a $10 bill. • Generally accepted, which means that it can be used to buy anything and everything.
MEANS OF PAYMENT A method of settling a debt. When a payment has been made, the deal is complete. THE FUNCTIONS OF MONEY • Medium of exchange • Unit of account • Store of value MEDIUM OF EXCHANGE An object that is generally accepted in return for goods and services. Money is a medium of exchange. Without money, you would have to exchange goods and services directly for other goods and services – an exchange called barter.
BARTER The direct change of goods and services for other goods and services for other goods and services, which requires a double coincidence of wants. UNIT OF ACCOUNT It is an agreed-upon measure for stating the prices of goods and services.
Good Price in money units Price in units of
another good Rock concert $64.00 8 movies
Movie $8.00 2 cappuccinos
Cappuccino $4.00 2 ice cream cones
Ice cream cone $2.00 4 sticks of gum
Stick of gum $0.50 1 bar of local candy
STORE OF VALUE It is any commodity of token that can he held and exchanged later for goods and services. Money acts as a store of value. If it did not, it would not be accepted in exchange for goods and services.
The more stable the value of commodity or token, the better it can act as a store of value and the value more useful it is as money. FIAT MONEY Fiat is a Latin word that means decree or order. Money in the world today is called fiat money. It is money because the law decrees it to be so. The objects used as money have value only because of their legal status as money.
• Currency • Deposits at banks and other financial institutions FIAT MONEY CONSISTS OF: CURRENCY The notes (bills) and coins that we use.
DEPOSITS Deposits at banks, credit unions, savings banks, and savings and loan associations are also money. Deposits are money because they can be used to make payments. You don’t have to go to the bank. You can just write a check or use your debit card. REMEMBER: CURRENCY INSIDE THE BANK IS NOT MONEY. OFFICIAL MEASURES OF MONEY: M1 AND M2 M1 Consists of currency held by individuals and businesses, traveler’s checks, and checkable deposits owned by individuals and businesses. Its components serve as means of payment.
M2 Consists of M1 plus savings deposits and time deposits, money market funds, and other deposits.
M3 M3 includes M2 plus longer-term time deposits and money market funds with more than 24-hour maturity. CHECKS, CREDIT CARDS, DEBIT CARDS, AND E-CHECKS CHECK A check is not money. It is an instruction to a bank to make a payment.
CREDIT CARDS A credit card is not money. It is a special type of ID card that gets you an instant loan.
DEBIT CARDS It works like a paper check, only faster. Just as a check isn’t a money, neither is a debit card.
E-CHECKS An electronic equivalent of paper notes (bills) and coins. It is an electronic currency, and for people who are willing to use it, e-cash works like other forms of money. THE BANKING SYSTEM Consists of the Federal Reserve and the banks and other institutions that accept deposits and that provide the services that enable people and businesses to make and receive payments.
THREE TYPE OF FINANCIAL
INSTITUTIONS: • Commercial banks • Thrift institutions • Money market funds BANK • A bank is a financial intermediary that accepts deposits from savers and makes loans to borrowers.
Role of Banks: 1. Pooling of funds 2. Gathering information about borrowers COMMERCIAL BANKS A financial institution that provides various financial service, such as accepting deposits and issuing loans. Commercial bank customers can take advantage of a range of investment products that commercial banks offer like savings accounts and certificates of deposit.
RESERVES Are the currency deposits that are not lent out to a bank's clients. A small fraction of the total deposits is held internally by the bank in cash vaults or deposited with the central bank.
REQUIRED RESERVE RATIO
The minimum percentage of deposits that the Fed requires banks and other financial institutions to hold in reserves. LIQUID ASSETS A liquid asset is an asset that can be converted into cash quickly, with minimal impact to the price received in the open market. Liquid assets include money market instruments and government bonds. Federal funds rate is the interest rate on interbank loans.
SECURITIES A security is a financial instrument that represents an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option. A security is a fungible, negotiable financial instrument that represents some type of financial value. The company or entity that issues the security is known as the issuer.
LOANS Are the provision of funds to businesses and individuals. Banks earn the highest rate on unpaid credit card balances, which are loans to credit card holders. KINDS OF THRIFT INSTITUTIONS
SAVINGS AND LOAN ASSOCIATION (S&L)
A financial institution that accepts checkable deposits and savings deposits and that makes personal, commercial, and home-purchase loans.
SAVINGS BANK Accepts savings deposits and makes mostly consumer and home- purchase loans. The depositors own some savings bank called mutual savings bank.
CREDIT UNION Owned by a social or economic group, such as a firm’s employees, that accepts saving deposits and makes mostly consumer loans. MONEY MARKET FUNDS A financial institution that obtains funds by selling shares and uses these funds to buy assets such as U.S. Treasury bills. Money market funds act like bank deposits. Shareholders can write checks on their money market funds accounts, but there are restrictions on most of these accounts. FACTORS THAT LIMIT THE QUANTITY OF DEPOSITS THE MONETARY BASE Banks have a desired level of reserves and households and firms have a desired level of currency holding and both of these desired holdings of the monetary base depend of the quantity of money.
DESIRED RESERVES The reserves that the bank chooses to hold. The desired reserve ratio is the ratio of reserves to deposits that a bank wants to hold. Excess reserves are it actual reserves minus desired reserves.
DESIRED CURRENCY HOLDING
Money is held in the form of currency and bank deposits. Currency drain is the leakage of currency from the banking system. While currency drain ratio is the ratio of currency to deposits. THE MONEY MULTIPLIER The number which a change in the monetary base is multiplied to find the resulting change in the quantity of money. It is also the ratio of the change in the quantity of money to the change in the monetary base. RESERVES REQUIRED RESERVES These are the minimum amount of legal reserves that a bank is required by law to keep against its deposit liabilities. For example, if the required reserve ratio is 1: 5, or 20 percent, a bank with checkable deposits of $1 million must hold at least $200,000 of required legal reserves.
EXCESS RESERVES These are the amount of a bank’s legal reserves over and above its required reserves.
Therefore: Excess reserves = legal reserves – required reserves MONEY MULTIPLIER (DEPOSIT MULTIPLIER) Is a function used to describe the amount of money a bank creates in additional money supply through the process of lending the available capital it has in excess of the bank's reserve requirement. EXAMPLE
Assuming that required reserve ratio is
10%. Queency then deposited P1000.00 in her savings account. How much is the change in money supply?
Money Multiplier = 1 = 10 .10
P900 x 10 = P9000 FRACTIONAL RESERVES BANKING Fractional reserve banking is a banking system in which only a fraction of bank deposits are backed by actual cash on hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties. DEPOSIT CREATION PROCESS Two characteristics: - Money creation and reserves - Bank panics and regulation MONETARY POLICY
Monetary policy is the process by which the monetary
authority of a country, like the central bank or currency board, controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency. TOOLS OF MONETARY POLICY OPEN-MARKET OPERATIONS Open market operations are when central banks buy or sell securities from the country's banks. When the central bank buys securities, it adds cash to the banks' reserves.
DISCOUNT RATE The discount rate is the third tool. It's the rate that central banks charge its members to borrow at its discount window. Since the rate is high, banks only use this if they can't borrow funds from other banks.
REQUIRED RESERVE RATIO
The reserve requirement refers to the deposit a bank must keep on hand overnight, either in its vaults or at the central bank. A low reserve requirement allows the banks to lend more of their deposits. It's expansionary because it creates credit. EXPANSIONARY VS CONTRACTIONARY MONETARY POLICY The Federal Open Market Committee aims to increase the money supply in expansionary while a decrease in money supply is aimed in contractionary monetary policy. All will be done through:
EXPANSIONARY CONTRACTIONARY Purchase securities on the open market, Sell securities on the open market, known as Open Market Operations known as Open Market Operations Lower the Federal Discount Rate Raise the Federal Discount Rate Lower the Reserve Requirements Raise Reserve Requirements
