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Money and Banks

Money and Banks

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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