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MONEY

BANKING SYSTEM
MONETARY POLICY

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.

Legal reserves = required reserves + excess 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