Search for notes by fellow students, in your own course and all over the country.
Browse our notes for titles which look like what you need, you can preview any of the notes via a sample of the contents. After you're happy these are the notes you're after simply pop them into your shopping cart.
Title: Money, Prices, and Financial Intermediaries
Description: These notes describe how financial intermediaries influence the money supply and price levels. These are college level notes but they can also be used for high school classes and AP courses.
Description: These notes describe how financial intermediaries influence the money supply and price levels. These are college level notes but they can also be used for high school classes and AP courses.
Document Preview
Extracts from the notes are below, to see the PDF you'll receive please use the links above
Money, Prices, and Financial Intermediaries
Sunday, March 27, 2016
10:33 PM
The Banking System and the Allocation of Saving to Productive Uses
• The banking system helps diversification by spreading the wealth of an
individual savor on many borrowers and the risk of many borrowers over many
savers
○ Financial Intermediaries: firms that extend credit to borrowers using
funds raised from savers
○ Brings together savers looking for good investments and borrowers with
worthwhile projects
Money and Its Uses
• Money: any asset that can be used in making purchases
○ Medium of Exchange: an asset used in purchasing goods and services
○ Barter: the direct trade of goods or services for other goods or services
○ Allows people to specialize in producing certain goods and services
○ Unit of Account: a basic measure of economic value
○ Store of Value: an asset that serves as a means of holding wealth
• M1: the sum of currency outstanding and balances held in checking accounts
• M2: all the assets in M1 plus some additional assets that are usable in making
payments but at greater cost or inconvenience than currency or checks
• Credit card balances are never counted as money, since they are merely
obligations to pay others
Commercial Banks and the Creation of Money
• The money supply is the currency and the deposit balances in the banks
• Bank Reserves: cash or similar assets held by banks for the purpose of meeting
depositor withdrawals and payments
○ 100% Reserve Banking: a situation in which banks' reserves equal 100%
of their deposits
○ Not counted as money supply
• Bank deposit balances are counted as money supply
• Reserve-Deposit Ratio: bank reserves/deposits
○ Fractional-Reserve Banking System: a banking system in which bank
reserves are less than deposits so the reserve-deposit ratio is less than
100%
• Required reserves are the amount of currency a bank needs to keep based on
their reserve-deposit ratio
• Reserve-Deposit Ratio: bank reserves/deposits
○ Fractional-Reserve Banking System: a banking system in which bank
reserves are less than deposits so the reserve-deposit ratio is less than
100%
• Required reserves are the amount of currency a bank needs to keep based on
their reserve-deposit ratio
○ Will lend out the extra reserves
○ The process of expansion of loans and deposits will only end when
reserves equal the reserve-deposit ratio
§ Assets = liabilities
• Money supply = currency held by public + bank deposits = currency held by
public + (bank reserves/desired reserve-deposit ratio)
Central Banks, the Money Supply, and Prices
• The Federal Reserve System: the central bank of the United States
• Monetary Policy: determination of the nation's money supply
• Open-Market Purchase: the purchase of government bonds from the public by
the Fed for the purpose of increasing the supply of bank reserves and the
money supply
○ Fed buys bonds the public purchased from the government and pays with
newly printed money
• Open-Market Sale: the sale by the Fed of the government bonds to the public
for the purpose of reducing bank reserves and the money supply
• Open-Market Operations: open-market purchases and open-market sales
• In the long run, the amount of money circulating in an economy and the general
level of prices are closely linked
○ Countries with higher rates of money growth tend to have higher rates of
inflation
• Velocity: a measure of the speed at which money changes hands in transactions
involving final goods and services
○ Nominal GDP/stock of money
○ V = (P x Y)/M
§ V = velocity
§ P = price level
§ Y = real GDP
§ M = money stock
○ The higher the ratio, the faster the dollar is circulating
• Quantity Equation: (money)(velocity) = nominal GDP
○ Price level and Money supply are directly related
• Rapid rates of money growth are the result of large government budget deficits
○ Sometimes deficit so large, only way to finance is to print money
§ M grows at extremely high rate --> price grows at same rate -->
hyperinflation
○ To reduce hyperinflation, reduce the growth rate of money supply
• Rapid rates of money growth are the result of large government budget deficits
○ Sometimes deficit so large, only way to finance is to print money
§ M grows at extremely high rate --> price grows at same rate -->
hyperinflation
○ To reduce hyperinflation, reduce the growth rate of money supply
Title: Money, Prices, and Financial Intermediaries
Description: These notes describe how financial intermediaries influence the money supply and price levels. These are college level notes but they can also be used for high school classes and AP courses.
Description: These notes describe how financial intermediaries influence the money supply and price levels. These are college level notes but they can also be used for high school classes and AP courses.