Final Exam

1
Final Exam

• Exam Date May 6, 2006
• Exam Time 200-400pm
• Room Terrill Hall 121

2
Request to Reschedule Final Exam

• Taking both 1100 and 1110
• 3 or more finals scheduled for that day
• Religious reasons
• Other? (appropriate documentation)
• All requests must be submitted to Kari Battaglia,
  by Monday, May 1st

3
NATURE OF MONEY

• widely acceptable in exchange for goods and
  services
• acceptable as payment for debts

4
MONEY vs. BARTER

• Money is more efficient than barter because it
• decreases transaction time
• increases the number of transactions
• ? Exchange is easier and less time-consuming in a
  money economy

5
PHYSICAL CHARACTERISTICSOF MONEY

• portable
• divisible
• Recognizable
• ? Money is any good that is widely accepted for
  purposes of exchange

6
WHAT GIVES MONEY VALUE?

• no longer backed by gold
• fiat money backed by the government
• value lies in peoples trust in the government and
  their willingness to accept it for G S.

7
Three Functions of Money

• Medium of exchange
• ? money is the medium through which exchange
  occurs
• Unit of account
• ? a common measure in which values are expressed
• Store of value
• ? ability to maintain its value over time

8
Three Functions of Money (cont.)

• A pizza maker lists the price of pizza as 10
• A 50 travelers check
• A 10 food stamp
• A vacation home in the Caribbean

9
M1NARROWLY DEFINED MONEY

• currency
• checkable deposits
• travelers checks

10
CURRENCY

• coins and bills
• currency in circulation and currency held outside
  the bank are equivalent

11
CHECKABLE DEPOSITS

• all checkable deposits whether at a bank, savings
  and loan, or credit union.
• also called transactions accounts and demand
  deposits
• debit cards that draw directly from your account
  are included

12
Exhibit 1 The Components of M1
SOURCE Board of Governors of the Federal Reserve
System.
13
MONEY SUPPLY

• checkable deposits are the largest component of
  M1 (almost 70)
• the term Money Supply refers to M1 unless
  otherwise noted

14
M2BROADLY DEFINED MONEY

• M1
• small time deposits
• savings deposits
• money market deposit accounts (MMDA)
• money market mutual fund (MMMF)

15
M3 and L

• M3 and L add less liquid assets such as
• large time deposits (M3)
• bankers acceptances (L)

16
Money supply measures, April 2002

• _Symbol Assets included Amount (billions)_
• C Currency 598.7
• M1 C demand deposits, 1174.0 travelers
  checks, other checkable deposits
• M2 M1 small time deposits, 5480.1 savings
  deposits, money market mutual funds,
  money market deposit accounts
• M3 M2 large time deposits, 8054.4
  repurchase agreements, institutional money
  market mutual fund balances

17
CREDIT CARDS

• Credit cards are NOT money
• Credit cards are short term loans - you borrow
  from the bank and then must repay that loan.
• The existing money is shifted around but Ms does
  not change

18
100-PERCENT-RESERVE BANKING

• All deposits are held as reserves
• Banks accept deposits, place the money in
• reserve, and leave the money there until the
• depositor makes a withdrawal

19
FRACTIONAL RESERVE BANKING

• Banks are not required to keep every dollar that
  you deposit on reserve.
• The Federal Reserve sets the required reserve
  ratio which determines the percentage of deposits
  that must be held.

20
BANK RESERVES

• TOTAL RESERVES - cash in the vault and bank
  deposits at the Fed.
• REQUIRED RESERVES - total deposits X required
  reserve ratio
• EXCESS RESERVES - total reserves - required
  reserves

21
Examples

• Calculate required reserves (RR) when total
  deposits are 80,000 and the required-reserve
  ratio is r 20
• What is the required-reserve ratio if banks are
  required to hold 100 in reserves to support 500
  in deposits?
• Calculate deposits if required reserves are 150
  and the required-reserve ratio is r 20

22
Examples

• What are excess reserves if 40 of the 100 in
  total reserves held by banks are required
  reserves?
• How much do banks have in excess reserves if
  total reserves are 400, deposits are 2,000 and
  the required-reserve ratio is 20?

23
BANK ACTIVITIES

• Banks accept deposits and offer checking services
• Banks keep a percentage of the deposits on
  reserve
• Excess reserves are available to be loaned out
• Banks earn money from loans

24
Exhibit 3 The Money Supply Expansion and
Contraction Processes
25
T - Accounts

• BANK TWO
• Assets Liabilities
• Total Reserves Demand Deposits
• Loans

26
MONEY EXPANSION

• When banks make loans they create money
• When the loans are spent, it finds its way into
  other banks.
• These banks keep a portion of these deposits on
  reserve and then loan the rest out.

27
BANK TWOr .10

• Assets Liabilities

Reserves 100
Demand Deposits 1,000
Loans 900
28
BANK TWOr .10(fully loaned up)

• Assets Liabilities

Reserves 100
Demand Deposits 1,000
RR 100
ER 0
Loans 900
29
BANK TWOr .10

• Assets Liabilities

Reserves 200
Demand Deposits 1,000
RR 100
ER 100
Loans 800
30

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31
Examples

• By how much can the banking system expand
  deposits if total reserves are 600, deposits are
  2,500 and the required-reserve ratio is 20?

32
Money Expansion

• When banks make loans they increase the money
  supply (M1)
• The maximum change in checkable deposits is (
  1/r x change in reserves )
• simple deposit creation multiplier 1/r
• Reasons actual creation may be less than the
  maximum
• cash leakages
• nonzero excess reserves

33
SIMPLE DEPOSIT MULTIPLIER

• If r .10 then the simple deposit multiplier
  is 10
• If r .15 then the simple deposit multiplier is
  6.67
• If r .20 then the simple deposit multiplier is
  5

34
MONEY DESTRUCTIONcontractionary policy

• The FED can also choose to remove money from the
  economy
• When the FED reduces the amount of money in
  circulation this impacts banks
• as bank deposits fall, banks are forced to reduce
  the amount of loans (call in loans)
• The decrease in loans reduces the money supply