The Monetary System

1. The Monetary System .

2. The History of Money • Barter - is a type of trade in which goods or services are directly exchanged for other goods and/or services, without the use of money. • Commodity money • This money takes the form of a commodity with intrinsic value. • Examples: precious metals: gold, silver, conch shells, barley, leather. • Standardized coinage • Fiat money(fiduciarymoney)is used as money because of government decree. • It does not have intrinsic value, it has value because of decree. • Examples: Coins, currency, check deposits. • Electronic money

3. Money is the set of assets in the economy that people use to buy goods and services from other people.

4. Functions of Money • Money has three functions in the economy: • Medium of exchange • Unit of account • Store of value

5. Money in the economy • Currencyis the paper bills and coins in the hands of the public. • Demand depositsare balances in bank accounts that depositors can access on demand by using debit cardorwriting a check.

6. Money Supply • M0: currency (notes and coins) in circulation and in bank vaults, plus reserves which commercial banks hold in their accounts with the central bank (minimum reserves). M0 is usually called the monetary base - the base from which other forms of are created - and is traditionally the most liquid measure of the money supply; • M1: currency in circulation + checkable deposits (checking deposits, officially called demand deposits, and other deposits that work like checking deposits). M1 represents the assets that strictly conform to the definition of money: assets that can be used to pay for a good or service or to repay debt.

7. Money supply cont. • M2: M1 + savings deposits, time deposits less than $100,000 and money market deposit accounts for individuals. M2 represents money and "close substitutes" for money.M2 is a key economic indicator used to forecast inflation. • M3: M2 + large time deposits, institutional money-market funds, etc.

8. National Bank of Poland • The National Bank of Poland is the central bank of Poland. • Its tasks are stipulated in the Constitution of the Republic of Poland, the Act on the National Bank of Poland and the Banking Act. • The fundamental objective of the NBP's activity is to maintain price stability. Under the Monetary Policy Strategy beyond 2003 drawn up by the Monetary Policy Council, the objective of the NBP is to stabilise the inflation rate at the level of 2.5% with a permissible fluctuation band of +/- 1 percentage point.

9. Areas of activity of the NBP • monetary policy, • issue of currency, • development of payment system, • management of official reserves, • education and information, • services to the State Treasury.

10. Monetary Policy Council The Council was constituted on February 17, 1998. It is composed of: • a Chairperson, this being the President of the NBP, • nine members appointed in equal numbers by the President of the Republic of Poland, the Sejm and the Senate. • Members of the Council are appointed for a term of six years.

11. The Federal Reservein U.S. • The Federal Reserve (Fed) serves as the nation’s central bank. • It is designed to oversee the banking system. • It regulates the quantity of money in the economy. • It was created in 1914 to restore confidence in the nation’s banking system.

12. The Federal Reserve System • The Structure of the Federal Reserve System: • The primary elements in the Federal Reserve System are: 1) The Board of Governors 2) The Regional Federal Reserve Banks 3) The Federal Open Market Committee

13. The Federal Reserve System

14. Three Primary Functions of the Fed • Regulates banks to ensure they follow federal laws intended to promote safe and sound banking practices. • Acts as a banker’s bank, making loans to banks and as a lender of last resort. • Conducts monetary policy by controlling the money supply.

15. NBP’sTools of Monetary Control • NBP has three tools in its monetary toolbox: • Open-market operations • Changing the reserve requirement • Changing the discount rate

16. Problems in Controlling the Money Supply • The National Bank control of the money supply is not precise. • The National Bankmust wrestle with two problems that arise due to fractional-reserve banking. • National Bank does not control the amount of money that households choose to hold as deposits in banks. • National Bankdoes not control the amount of money that bankers choose to lend.

17. Money creation Money creation is the process by which money is produced or issued. There are three different ways to create money: • manufacturing a new monetary unit, such as paper currency or metal coins (money creation) • loaning out a physical monetary unit multiple times through fractional-reserve lending (credit creation) • buying of government securities or other financial instruments by central bank through Open market operations (electronic creation)

18. Banks and The Money Supply • Reserves are deposits that banks have received but have not loaned out. • In a fractional reserve banking system, banks hold a fraction of the money deposited as reserves and lend out the rest. • When a bank makes a loan from its reserves, the money supply increases.

19. Money Creation • The money supply is affected by the amount deposited in banks and the amount that banks loan. • The fraction of total deposits that a bank has to keep as reserves is called the reserveratio.

20. Original deposit = $ 100.00 First lending = $ 90.00 [=0.9 x $100.00] Second lending = $ 81.00 [=0.9 x $90.00] Third lending = $ 72.90 [=0.9 x $81.00] ¯ ¯ ¯ ¯ Total money supply = $1,000 The Money Multiplier How much money is created in this economy?Suppose that reserve ratio=10%

21. The Money Multiplier The money multiplier (MM) is the reciprocal of the reserve ratio: MM= 1/r • With a reserve requirement, R = 20% or 1/5, • The multiplier is 5. • Problem of Bank Runs

22. Thecomplex Money multiplier • where: • C – cashoutside banking system • D – deposits • R – requiredreserves • r – reserveratio • g - "Cash drain," the tendency of households to hold part of any additional money as cash

23. Bibliography • http://www.mhhe.com/economics/mcconnell15e/graphics/mcconnell15eco/common/dothemath/complexmoneymultiplier.html • www.wikipedia.org • Czarny B. „Podstawy Ekonomii”, PWE, 2002 • www.nbp.pl • http://windward.hawaii.edu/facstaff/briggs-p/Macroeconomics/macrolectures.htm