12_Econ8e_PPT_Ch12

Views:
 
Category: Education
     
 

Presentation Description

No description available.

Comments

Presentation Transcript

Money and banking : 

Money and banking Chapter 12 Economics, 8th Edition Boyes/Melvin

What is Money? : 

What is Money? Money is anything that is generally acceptable to sellers in exchange for goods and services. A liquid asset is an asset that can easily (i.e., quickly, cheaply, conveniently) be exchanged for goods and services. 2 Copyright © Cengage Learning. All rights reserved.

The History of Money : 

The History of Money Click on the link below for a brief history of money: http://www.pbs.org/wgbh/nova/moolah/history.html 3 Copyright © Cengage Learning. All rights reserved.

What is Money? : 

What is Money? Functions of Money Medium of exchange Unit of account Store of value Standard of Deferred Payment 4 Copyright © Cengage Learning. All rights reserved.

Medium of Exchange (1) : 

Medium of Exchange (1) The use of money as a medium of exchange lowers transactions costs. Trade without money, directly exchanging goods for goods, is called barter. Barter requires a double coincidence of wants—finding someone who wants what you have and who has what you want is time-consuming and costly. 5 Copyright © Cengage Learning. All rights reserved.

Medium of Exchange (2) : 

Medium of Exchange (2) A medium of exchange must be: Widely accepted for payment Portable: easy to transport and transfer to the seller Divisible: measurable in both small and large units 6 Copyright © Cengage Learning. All rights reserved.

Unit of Account : 

Unit of Account Money acts as a common unit of measurement, allowing for the comparison of the values of very dissimilar things. It makes accounting possible and lowers information costs. 7 Copyright © Cengage Learning. All rights reserved.

Store of Value : 

Store of Value For money to be a store of value, it must be durable, able to retain value over time. Inflation can reduce the effectiveness of money as a store of value. This can lead to currency substitution—the substitution of foreign money for domestic money when the domestic economy has a high rate of inflation. 8 Copyright © Cengage Learning. All rights reserved.

Standard of Deferred Payment : 

Standard of Deferred Payment Debt is denominated in money terms. The standard for repayment is money. There is a difference between money and credit: Money is what you use to pay for goods and services. Credit is available savings that are lent to borrowers to spend. Credit is debt, something you owe. Credit cards are not money! 9 Copyright © Cengage Learning. All rights reserved.

M1 Money Supply : 

M1 Money Supply M1 is the most liquid measure of the money supply. M1 includes: Currency Travelers’ Checks Demand Deposits (checking accounts) Other Checkable Deposits (interest-bearing checking) Demand Deposits and Checkable Depositsare called transactions accounts—checking accounts that can be drawn upon to make payments. 10 Copyright © Cengage Learning. All rights reserved.

U.S. Money Supply: M1 : 

U.S. Money Supply: M1 11 Copyright © Cengage Learning. All rights reserved.

About Currency : 

About Currency In 2009, currency was 54% of M1. U.S. currency today is not backed by gold or silver. Money backed by gold or silver (or something else of value) is called commodity money. 12 Copyright © Cengage Learning. All rights reserved.

Problems with Commodity Money : 

Problems with Commodity Money The precious metal in gold or silver coins may be worth more than the face value of the coins. According to Gresham’s Law, if two coins have the same face value but different intrinsic (commodity) values, the cheaper coin will be used to make transactions and the other coin will be hoarded. “Bad money drives out good.” 13 Copyright © Cengage Learning. All rights reserved.

M2 money supply : 

M2 money supply M2 money supply includes the M1 money supply plus: Savings deposits Small denomination time deposits (CDs) Retail money market mutual funds 14 Copyright © Cengage Learning. All rights reserved.

U.S. Money Supply: M2 : 

U.S. Money Supply: M2 15 Copyright © Cengage Learning. All rights reserved.

International Reserve Currency : 

International Reserve Currency An international reserve asset is used to settle debts between governments. Gold is not the most common international reserve asset. National currencies serve this function. These currencies are referred to as international reserve currencies. 16 Copyright © Cengage Learning. All rights reserved.

International Reserve Currencies over Time : 

International Reserve Currencies over Time 17 Copyright © Cengage Learning. All rights reserved.

Composite Currencies : 

Composite Currencies A composite currency is an artificial unit of account that is an average of the values of several national currencies. SDR: Special Drawing Right, average of the values of U.S. dollar, the euro, the Japanese Yen, and the U.K. pound. ECU: European Currency Unit. average of the values of the Austrian schilling, the Belgian franc, the Danish krone, the Finnish markkaa, the French franc, the German mark, the Greek drachma, the Irish pound, the Italian lira, the Luxembourg franc, the Netherlands guilder, the Spanish peseta, and the Portuguese escudo. Replaced by the Euro. 18 Copyright © Cengage Learning. All rights reserved.

Financial Intermediaries : 

Financial Intermediaries Financial intermediaries are firms that take deposits from households and firms and make loans to other households and firms. 19 Copyright © Cengage Learning. All rights reserved.

Financial Intermediaries : 

Financial Intermediaries Four Types of Financial Intermediaries 1) Commercial banks 2) Savings and loan associations 3) Savings banks and credit unions 4) Money market mutual funds 20 Copyright © Cengage Learning. All rights reserved.

U.S. Depository Institutions : 

U.S. Depository Institutions 21 Copyright © Cengage Learning. All rights reserved.

Deposit Insurance : 

Deposit Insurance To reduce the likelihood of bank panics, the Federal Deposit Insurance Corporation (FDIC) was created. The FDIC insures bank deposits against losses up to $250,000 so that depositors do not lose their deposits if a bank fails. 22 Copyright © Cengage Learning. All rights reserved.

Bank Failures : 

Bank Failures 23 Copyright © Cengage Learning. All rights reserved.

International Banking (1) : 

International Banking (1) Eurocurrency market or “offshore banking”:the market for deposits and loans generally denominated in a currency other than the currency in which the transaction occurs. Typically two sets of banking rules: restrictive regulations for banking in the domestic market and little or no regulation of offshore banking activities. 24 Copyright © Cengage Learning. All rights reserved.

International Banking (2) : 

International Banking (2) An International Banking Facility (IBF) is a division of a U.S. bank that receives deposits from and make loans to nonresidents without the restrictions that apply to domestic U.S. banks. This allows domestic banks to compete more fairly with offshore banks. 25 Copyright © Cengage Learning. All rights reserved.

Informal Markets in Developing Countries : 

Informal Markets in Developing Countries ROSCAs—Rotating Savings and Credit Associations Hawala – an international informal financial market used by Muslims 26 Copyright © Cengage Learning. All rights reserved.

Fractional Reserve Banking : 

Fractional Reserve Banking A system in which banks keep less than 100 percent of the deposits available for withdrawal. An outgrowth of goldsmith practices. 27 Copyright © Cengage Learning. All rights reserved.

Simple balance sheet for a bank : 

Simple balance sheet for a bank 28 Copyright © Cengage Learning. All rights reserved.

How Banks Create Money : 

How Banks Create Money Reserves: Actual and Required The reserve ratio is the fraction of a bank’s total deposits that are held in reserves. The required reserves ratio is the ratio of reserves to deposits that banks are required, to hold. Required reserves are those reserves which must be kept on deposit with the Federal Reserve in order to comply with the reserve requirements. Excess reserves are the cash reserves beyond those required, which can be loaned. 29 Copyright © Cengage Learning. All rights reserved.

How Banks Create Money : 

How Banks Create Money Deposit Expansion Multiplier = 1 Reserve Requirement (ratio) 30 Copyright © Cengage Learning. All rights reserved.

The Multiple Creation of Bank Deposits : 

The Multiple Creation of Bank Deposits 31 Copyright © Cengage Learning. All rights reserved.

authorStream Live Help