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Money and Banks

Money and Banks. Money Supply. The Money What is money? What form can money take? Why is money worth something? What happens to the value of the money over time?. The money Medium of exchange Barter may work but Have to find the right partner Have to have the double coincidence of wants

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Money and Banks

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  1. Money and Banks Money Supply

  2. The Money • What is money? • What form can money take? • Why is money worth something? • What happens to the value of the money over time?

  3. The money • Medium of exchange • Barter may work but • Have to find the right partner • Have to have the double coincidence of wants • Medium of exchange solves these problems • Store of value • Not a perfect one • Inflation • Unit of Account • Also not a perfect one • Inflation

  4. Forms of the money • Commodities • Stones on island of Yap • Cigarettes of POW camps • Precious metals • Coins • Paper money • Promise to pay, IOU • Fully backed • Fractionally backed • Gold standard • Fiat money • Deposit money

  5. Bank of Canada • Central bank • Banker to the commercial banks • Reserves • Banker to the federal government • Regulator of the money supply • Regulator of financial markets • Commercial banks • Financial intermediaries • Crediting business • Cheque/debit card clearing and collection • Profit seeking

  6. Commercial banks • Reserves • Bank runs of Great Depression • Fractional reserve system • Reserve ratio (actually held) • Fractional reserve system means reserve ratio < 1 • Target reserve ratio (would like to hold)

  7. Commercial bank system creates money • Suppose a $100 bill is dug from your backyard and deposited into bank A. • Assume banks hold 10 percent of deposits as reserves. • Assume individuals hold no currency. • Bank A: Assets Liabilities • Bank B: Assets Liabilities • Bank C: Assets Liabilities • Banking system: Assets Liabilities • This injection of $100 into the banking system will generate $1,000 of money!!! • Money Multiplier = 1/reserve ratio = The amount of money the banking system generates with each $1 of reserves

  8. Commercial bank system creates money • Money Multiplier = 1/reserve ratio = The amount of money the banking system generates with each $1 of reserves • This is the most money the system could generate, recall the assumptions: • Assume banks hold 10 percent of deposits as reserves. • Assume individuals hold no currency. • Excess reserves • Money Multiplier = 1/(actual reserve ratio v) • Kind of, reserve ratios may differ for the banks • Cash drain • If c is the ratio of cash people hold to deposits, • Money Multiplier = 1/(v + c) • Excess reserves and cash drain reduce Money Multiplier

  9. The money supply = total stock of money in the economy • Currency • In circulation • Bank deposits • Differing liquidity of various deposits • Chequing deposits • Term deposits • Liquidity of assets • Near money = easily convertible into money • Money Supply Measures

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