Money and interest rates. Lecture 8

Август 11, 2022

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Money and interest rates. Lecture 8

Содержание

2. Money and interest rates Lecture 8 Foundations of Economics
3. Outline The meaning and function of money The role of banks and central bank The supply
4. Teaching the Terms Commodity money Fiat money Representative money Liquidity
5. Problems with barter Inefficient Time consuming Difficult to satisfy wants and needs consistently
6. Functions of Money
7. Sources of Money’s Value Commodity Money – medium of exchange has intrinsic value Representative money –
8. Characteristics of Money Portable Durable Divisible Uniform Limited Acceptable
9. Monetary Aggregates
10. Two Definitions of the Money Supply, December 2017
11. Monetary Aggregates
12. Two Definitions of the Money Supply, December 2017
13. Liquidity Ability to convert an asset to a medium of exchange without loss of value Factors
15. Financial Markets
16. Types of Financial Intermediaries Banks, savings and loans, credit unions Mutual funds Life insurance companies Pension
17. The Banking System How banking evolved From using gold as commodity money To goldsmiths who issued
18. Features of fractional reserve banking Bank profitability Banks are in business to earn profits Interest on
19. The Banking System Principles of bank management: Profit vs. Safety How do banks maintain a reputation
20. The Banking System Banking - inherently risky business Safe only by cautious and prudent management But
22. The Origins of the Money Supply Bankers books Asset An item of value owned Liability Item
23. Table 1 Balance Sheet of Bank-a-Mythica, December 31, 2014 Net Worth = Assets - Liabilities
24. Bank Assets Cash and operational balances in the central bank Short-term loans Market loans Bills of
25. Bank Liabilities = Deposits Sight deposits Time deposits Certificates of deposit (CDs) Sale and repurchase agreements
26. Banks and Money Creation In general If the required reserve ratio = m Money multiplier =
28. Monetary Policy and interest rates Government (through independent agency) regulates money supply to maintain stability During
29. The Central Bank Functions: Issue notes Bank to the government Bank to banks Bank to overseas
30. The Need for Monetary Policy During an economic boom Banks expand money supply Undesirable momentum to
31. Money supply The supply of money is to be determined by the Central Bank (exogenous). Therefore
32. Money Demand Quantity of money demanded is the amount of wealth that the individuals choose to
33. Demand for money The motives for holding money: liquidity preference Transactions and precautionary demand for money
34. O Rate of interest Money re Me Equilibrium in the money market
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Money and interest rates
Lecture 8
Foundations of Economics

Слайд 3

Outline
The meaning and function of money
The role of banks and

central bank
The supply and demand for money
Equilibrium in the money market

Слайд 4

Teaching the Terms
Commodity money
Fiat money
Representative money
Liquidity

Слайд 5

Problems with barter
Inefficient
Time consuming
Difficult to satisfy wants and needs consistently

Слайд 6

Functions of Money

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Sources of Money’s Value
Commodity Money – medium of exchange has intrinsic

value
Representative money – medium of exchange represents a claim on an item of value
Fiat Money – medium of exchange has value by government decree

Слайд 8

Characteristics of Money
Portable
Durable
Divisible
Uniform
Limited
Acceptable

Слайд 9

Monetary Aggregates

Слайд 10

Two Definitions of the Money Supply, December 2017

Слайд 11

Monetary Aggregates

Слайд 12

Two Definitions of the Money Supply, December 2017

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Liquidity
Ability to convert an asset to a medium of exchange without

loss of value
Factors that affect liquidity include
Time constraints
Withdrawal restrictions
Minimum deposits
Market conditions
When liquidity decreases, savers demand compensation (interest)

Слайд 14

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Financial Markets

Слайд 16

Types of Financial Intermediaries
Banks, savings and loans, credit unions
Mutual funds
Life insurance

companies
Pension funds

Слайд 17

The Banking System
How banking evolved
From using gold as commodity money
To

goldsmiths who issued paper receipts backed by gold
Then clever goldsmiths started lending out “gold”
Fractional reserve banking system
Bankers keep as reserves only a fraction of deposits

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$Features of fractional reserve banking Bank profitability Banks are in business$

Features of fractional reserve banking
Bank profitability
Banks are in business to

earn profits
Interest on loans – interest on deposits
Bank discretion over money supply
Loans create new money
Banks decisions on how much to hold in reserves influences the supply of money
Exposure to bank runs
Keep prudent reserves and lend out money carefully

Слайд 19

The Banking System
Principles of bank management: Profit vs. Safety
How do banks

maintain a reputation for prudence?
Maintain a sufficiently level of reserves to minimize vulnerability to runs
Be cautious in making loans and investments since large losses undermine confidence

Слайд 20

The Banking System
Banking - inherently risky business
Safe only by cautious and

prudent management
But caution not the way to high profits
High profits come from
Low reserves and more loans
Loans to borrowers with questionable credit standing at higher interest rate

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The Origins of the Money Supply
Bankers books
Asset
An item of value owned
Liability
Item

of value owed; debts
Balance sheet - accounting statement
Left side: values of all assets
Right side: values of all liabilities and net worth

Слайд 23

Table 1
Balance Sheet of Bank-a-Mythica, December 31, 2014
Net Worth = Assets

- Liabilities

Слайд 24

Bank Assets
Cash and operational balances in the central bank
Short-term loans
Market loans
Bills

of exchange
Reverse repos
Long-term loans
Investments

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Bank Liabilities = Deposits
Sight deposits
Time deposits
Certificates of deposit (CDs)
Sale and repurchase

agreements (‘repos’)

Слайд 26

Banks and Money Creation
In general
If the required reserve ratio = m
Money

multiplier = 1/m
Banking system can convert each $1 of reserves into $1/m in new money
Money multiplier
Ratio of newly created bank deposits to new reserves
Change in money supply
= (1/m) ˣ Change in reserves

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Monetary Policy and interest rates
Government (through independent agency) regulates money supply

to maintain stability
During a recession
Banks prone to reduce money supply
Increase excess reserves
Decrease lending to less creditworthy applicants
Without government intervention contraction in money supply would aggravate recession

Слайд 29

The Central Bank
Functions:
Issue notes
Bank to the government
Bank to banks
Bank to overseas

central banks
Provides liquidity to banks
Operates the government’s monetary and exchange rate policy

Слайд 30

The Need for Monetary Policy
During an economic boom
Banks expand money supply
Undesirable

momentum to economy
Without intervention from central bank rapid money growth could lead to inflation

Слайд 31

Money supply
The supply of money is to be determined by the

Central Bank (exogenous).
Therefore money supply is independent of interest rate.

Слайд 32

Money Demand
Quantity of money demanded is the amount of wealth that

the individuals choose to hold as money, rather than as other assets.
How much money an individual will decide to hold is determined by:
The price level
Real income
The interest rate

Слайд 33

Demand for money
The motives for holding money: liquidity preference
Transactions and precautionary

demand for money
Speculative demand for money

Слайд 34

O
Rate of interest
Money
re
Me
Equilibrium in the money market

Слайд 35

Money and interest rates. Lecture 8

Содержание

Money and interest ratesLecture 8Foundations of Economics

Outline The meaning and function of moneyThe role of banks and

Teaching the TermsCommodity moneyFiat moneyRepresentative moneyLiquidity

Problems with barterInefficientTime consumingDifficult to satisfy wants and needs consistently

Functions of Money

Sources of Money’s ValueCommodity Money – medium of exchange has intrinsic

Characteristics of MoneyPortableDurableDivisibleUniformLimitedAcceptable

Monetary Aggregates

Two Definitions of the Money Supply, December 2017

Monetary Aggregates

Two Definitions of the Money Supply, December 2017

LiquidityAbility to convert an asset to a medium of exchange without

Financial Markets

Types of Financial IntermediariesBanks, savings and loans, credit unionsMutual fundsLife insurance

The Banking SystemHow banking evolvedFrom using gold as commodity money To

Features of fractional reserve banking Bank profitabilityBanks are in business to

The Banking SystemPrinciples of bank management: Profit vs. SafetyHow do banks

The Banking SystemBanking - inherently risky businessSafe only by cautious and

The Origins of the Money SupplyBankers booksAssetAn item of value ownedLiabilityItem

Table 1Balance Sheet of Bank-a-Mythica, December 31, 2014Net Worth = Assets

Bank AssetsCash and operational balances in the central bankShort-term loansMarket loansBills

Bank Liabilities = DepositsSight depositsTime depositsCertificates of deposit (CDs)Sale and repurchase

Banks and Money CreationIn generalIf the required reserve ratio = mMoney

Monetary Policy and interest ratesGovernment (through independent agency) regulates money supply

The Central BankFunctions:Issue notesBank to the governmentBank to banksBank to overseas

The Need for Monetary PolicyDuring an economic boomBanks expand money supplyUndesirable

Money supplyThe supply of money is to be determined by the

Money DemandQuantity of money demanded is the amount of wealth that

Demand for moneyThe motives for holding money: liquidity preferenceTransactions and precautionary

ORate of interestMoneyreMeEquilibrium in the money market

Похожие презентации

Money and interest rates
Lecture 8
Foundations of Economics

Outline
The meaning and function of money
The role of banks and

Teaching the Terms
Commodity money
Fiat money
Representative money
Liquidity

Problems with barter
Inefficient
Time consuming
Difficult to satisfy wants and needs consistently

Sources of Money’s Value
Commodity Money – medium of exchange has intrinsic

Characteristics of Money
Portable
Durable
Divisible
Uniform
Limited
Acceptable

Liquidity
Ability to convert an asset to a medium of exchange without

Types of Financial Intermediaries
Banks, savings and loans, credit unions
Mutual funds
Life insurance

The Banking System
How banking evolved
From using gold as commodity money
To

Features of fractional reserve banking
Bank profitability
Banks are in business to

The Banking System
Principles of bank management: Profit vs. Safety
How do banks

The Banking System
Banking - inherently risky business
Safe only by cautious and

The Origins of the Money Supply
Bankers books
Asset
An item of value owned
Liability
Item

Table 1
Balance Sheet of Bank-a-Mythica, December 31, 2014
Net Worth = Assets

Bank Assets
Cash and operational balances in the central bank
Short-term loans
Market loans
Bills

Bank Liabilities = Deposits
Sight deposits
Time deposits
Certificates of deposit (CDs)
Sale and repurchase

Banks and Money Creation
In general
If the required reserve ratio = m
Money

Monetary Policy and interest rates
Government (through independent agency) regulates money supply

The Central Bank
Functions:
Issue notes
Bank to the government
Bank to banks
Bank to overseas

The Need for Monetary Policy
During an economic boom
Banks expand money supply
Undesirable

Money supply
The supply of money is to be determined by the

Money Demand
Quantity of money demanded is the amount of wealth that

Demand for money
The motives for holding money: liquidity preference
Transactions and precautionary

O
Rate of interest
Money
re
Me
Equilibrium in the money market