Chapter 13 Money
13.1 Money and its uses
The functions of money
- Means of exchange
It acts as a means of payment whenever items are ___ and ____.
Without money, market participants must trade one product for another product, a transaction known as____.
(Barter: a system of trading one product for another.)
Barter can occur only when there is a______between people who are trading.
(Coincidence of wants: the situation where someone purchasing an item finds a seller who wants what the purchaser is offering in return.)
Benefits of money
1. Overcome barter problem.
2. Minimize the time spent on finding another who wants to buy or sell.
3. Focus on the productive activity.
- Store of purchasing power
Provides a safe and accessible store of wealth between time it is earned and spent.
Money’s major advantage is its____, or the ease to which it can be turned into a means of payment.
(Liquidity: the ease with which an asset can be converted into a means of payment.)
- Measure of value
Money also provides buyers and sellers with a______, or ______.
(Unit of account: a pricing standard that allows all products to be valued consistently.)
The Canadian financial system
We have defined the functions money serves; we will consider the system in which it operates as well as the supply of money.
The supply of money comes from______.
(Deposit-takers: institutions or businesses that accept funds provided by savers and lend these funds to borrowers.)
Certain amount of money is kept in reserve which is called ______.
Cash reserves: funds kept on hand by deposit-takers to meet the needs of depositors withdrawing funds.
Deposits accepted are owned back to savers which are ____.
Funds they lend to borrowers are____.
These institutions make profit by paying power interest rates on deposit than charges on loan
Two categories of deposit-takers:
Chartered banks
Deposit-taker allowed by______to offer a wide range of financial services.
Big six
RBC, BMO, Scotiabank, TD bank, National bank
Oligopolies-----Control about 90% of Canadian’s chartered bank deposits and assets.
Near banks
Deposit-takers that are not chartered and have more ______; for example trust companies, mortgage loan companies, and credit unions.
1)Trust companies take deposits and grant loans, mainly to household.
2)Mortgage banks specialized in granting mortgages, and raise some of their funds through deposit taking. (A mortgage is a loan whose collateral is in the form of land and buildings.)
３）Credit unions are non-profit institutions that take deposit and grant loans to their members.
Other financial institutions
Other Financial Institutions:
Insurance companies and investment dealers.
Insurance companies offer insurance policies to their policies to their clients and use the funds to buy various types of income-producing financial assets.
Investment dealers buy and sell financial securities such as stocks and bonds for their customers.
The Supply Of Money
The supply of money is made up of＿＿and some ＿＿.
Currency: includes paper money and coins.
Deposits: The way chartered banks and near banks make their money is by taking deposits and lending these money to borrowers who will pay interest for the loan to make their profits.
１）Notice deposits:Accounts of funds for which deposit-takers may require notice before withdrawals can be made.
２）Term deposits: Accounts of funds to which depositors have no access for a fixed period of time.
(Traditionally, both chartered banks and near banks accept those two deposits)
３）Foreign currency deposits: accounts of funds held by Canadian residents that are valued in foreign currency.
(This type deposits provided by chartered banks and usually are valued in terms of the American dollar.)
Money Defined
The four most common definition of money used by economists and governments are M1, M2, M3, and M2+.
M1: the narrowest definition of money, consisting of currency outside chartered banks and publicly held demand deposits at chartered banks.
M2: a broader definition of money, consisting of M2 plus notice deposits and personal term deposits at chartered banks.
M3: the definition of money consisting of M2 plus non-personal term deposits and foreign currency deposits at chartered banks.
M2+: the definition of money consisting of M2 plus corresponding deposits at near banks and some other liquids assets.
Choosing a definition
The role of credit cards: a means of payment that provides ＿＿＿＿.
The introduction of debit cards: a means of payment that ＿＿＿＿＿from buyer to seller．
13.2The money market
The Demand for Money
- There are two types of demand
- Transactions Demand: demand for money that is related to its use a means of_____.
- Asset Demand: demand for money that is related to its use as store of______.
Bonds
- Formal contract of money borrowed for a period of time.
- Popular way for large businesses and governments to raise funds
- “______”, is when the bond reach its end term
- The bondholder will receive the bond issuer’s payment.
Money Demand: amounts of money ______at all possible interest rates.
Money demand schedule: money demand expressed in a table.
Money demand curve: money demand expressed on a graph.
- Change in asset demand cause by change in the interest rate
- Greater quantity of money at lower nominal interest rate = demand curve ______
- interest rate__ = quantity of money demand __
- interest rate ___ = quantity of money demand ___
- Real output or price level __ = all interest rate shifts _____
- Real output or price level __ = all interest rate shifts _____
The Supply of Money
- Amount of money supply stays ______( does not matter if the nominal _____ rate is different)
- Supply curve shifts only when government decision – makers decide
- Shifts right = ______money supply
- Shifts left = ______money supply
Money supply: set amount of money in the economy, as determined by ______decision – makers.
Money supply schedule: money supply expressed in a table.
Money supply curve: money supply expressed on a graph.
Equilibrium in the Money Market
- Supply and demand interact with each other in the money market
- In order to reach the ______point
- Interest rate above equilibrium level = ______of money
- Interest rate below equilibrium level = ______of money
13.3 Money creation
Desired Reserves
Minimum cash reserves that deposit-takers hole to satisfy/anticipated ______.
Reserve Ratio
Desired reserves expressed as a percentage of ______or as a decimal.
Reserve ratio
Reserve ratio=desired reserves/deposits
e.g. A bank has a reserve ratio of 0.10. If the bank has deposits of $100 million, then it will hold 10 percent of this dollar value as desired reserves $10 million ($100 million×0.10)
0.10=$10 million/$100 million
Practice 1:
- A bank has deposits of $100 million, and has a reserve ratio of 0.07. What are the bank’s desired reserves?
Excess Reserves:
Cash reserves that are in excess of desired reserves
Excess reserves=______-______
e.g. A chartered bank with deposits of $100 million and desired reserves of $10 million may find itself holding $14 million in actual cash reserves.
Practise1:
- A bank is holding $20 million in actual cash reserves, and its desired reserves are $12 million. What is the excess reserves?
The Money Creation Process
First translation
Cabot Bank
Assets Liabilities
Cash Reserves +$1000 / Saver A’s Deposit +$1000Second translation
Cabot Bank
Assets Liabilities
Cash Reserves $1000 / Saver A’s Deposit $1000Loan to Borrower X +$900 / Borrower X’s Deposit $0($900-$900)
6
Third translation
Cabot Bank
Assets Liabilities
Cash Reserves $100($1000-$900) / Saver A’s Deposit $1000Loan to Borrower X $900 / Borrower X’s Deposit $0($900-$900)
Fourth translation
Fraser Bank
Assets Liabilities
Cash Reserves +$900 / Saver B’s Deposit +$900Fifth translation
Fraser Bank
Assets Liabilities
Cash Reserves +$900 / Saver B’s Deposit +$900Loan to Borrower Y +$810 / Borrower Y’s Deposit +$810
The Money Multiplier
The value by which the amount of ______is multiplied to give the ______.
Change in money supply=______×______
e.g. The initial change in excess reserves is $900 and the final change in the money supply is $4500; the money multiplier, therefore, has a value of 5:
practise:
Theinitial change in excess reserves is $80 and the money multiplier has a value of 6. What is the final change in the money supply?
The Multiplier Formula
Money multiplier=1/reserve ratio
e.g. With banks reserving 10 percent of deposits, the money multiplier is 10 (1.00/0.10). In other words, the initial change in excess reserves ($900) eventually causes as increase in the money supply of $9000:
Practice
A bank has a reserve ratio of 0.10. If the final change in the money supply is $5000, what is the initial change in excess reserves?
Adjustments to the Money Multiplier
Publicly held currency
Differences in deposits