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Chapter 13_ Money_ Banking_ and the Financial Sector

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					Chapter 13: Money, Banking, and the Financial Sector
• What is the only industry that seriously concerns macroeconomists?
• 13.A. Why Is the Financial Sector Important to Macro

• 13.B. The Definitions and Functions of Money
• 13.C. Alternative Measures of Money • 13.D. Banks and the Creation of Money • 13.E. Regulation of Banks and the Financial Sector Dr. Tufte's ECON 2020 PowerPoint slides to
accompany Colander's text. 1

13.A.Why Is the Financial Sector Important to Macro?
• What stays in and what leaves the circular flow?
– Spending? – Saving?

• What has to happen to saving to get it back into the circular flow? • 13.A.1.The Role of Interest Rates in the Financial Sector • 13.A.2. Saving that Escapes the Circular Flow
Dr. Tufte's ECON 2020 PowerPoint slides to accompany Colander's text. 2

13.A.1.The Role of Interest Rates in the Financial Sector
• When you purchase a good:
– What do you give up? – What do you get in return?

– Do you continue to get that return (at the same rate) forever?
– What does that do to the price of used goods?
Dr. Tufte's ECON 2020 PowerPoint slides to accompany Colander's text. 3

13.A.1. Continued
• Are the answers to those questions the same when you are buying as asset? For the most part, yes, except:
– Is an asset depleted the same way a good is?

– Is the resale price of an asset typically better or worse than a good?

• What do you pay to borrow an asset?

• What is the ratio of what someone will pay to borrow an asset versus what they will pay to own it? Dr. Tufte's ECON 2020 PowerPoint slides to 4
accompany Colander's text.

13.A.2. Saving that Escapes the Circular Flow
• What has to happen to saving for it to get back into the circular flow?
• Are financial intermediaries strictly necessary for this to happen?
– Do they make it easier?

Dr. Tufte's ECON 2020 PowerPoint slides to accompany Colander's text.

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13.B. The Definitions and Functions of Money
• How does money differ from currency?
• 13.B.1. The U.S. Central Bank – The Fed.

• 13.B.2. Functions of Money

Dr. Tufte's ECON 2020 PowerPoint slides to accompany Colander's text.

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13.B.1. The U.S. Central Bank – The Fed.
• Is it our first central bank?
• Did we always have a central bank? Do most countries? • Where does a bank do it’s own banking?
– With other banks? – With the Federal Reserve?

• Who puts currency in circulation? Who prints it?
Dr. Tufte's ECON 2020 PowerPoint slides to accompany Colander's text. 7

13.B.2. Functions of Money
• What are they?
• Why don’t we barter? • Does an asset have to have (intrinsic) value to be used as money? • Is money a good or a bad way to settle on a value for a deferred payment? • How is liquidity related to your willingness to store value in the form of money?
Dr. Tufte's ECON 2020 PowerPoint slides to accompany Colander's text. 8

13.C. Alternative Measures of Money
• Is liquidity a subjective or objective concept?
• Does this make it easier or harder to define what money is? • 13.C.1. M1 • 13.C.2. M2 • 13.C.3. Beyond M2: L

• 13.C.4. Distinguishing between Money and Credit
Dr. Tufte's ECON 2020 PowerPoint slides to accompany Colander's text. 9

13.C.1. M1
• What assets are closest to currency?
• So, M1 is composed of what?

Dr. Tufte's ECON 2020 PowerPoint slides to accompany Colander's text.

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13.C.2. M2
• What assets are money, but are less likely to be used for transactions?
• So, M2 is composed of what?

Dr. Tufte's ECON 2020 PowerPoint slides to accompany Colander's text.

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13.C.3. Beyond M2: L
• Are there other (broader) definitions of money?
– As we include more assets in the list we call money, what is happening to their liquidity?

Dr. Tufte's ECON 2020 PowerPoint slides to accompany Colander's text.

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13.C.4. Distinguishing between Money and Credit
• Why isn’t a credit card money?
– Who is money an asset to, and for whom is it a liability? – When you make a purchase with a credit card, is an asset/liability pair created?
• Or, are assets exchanged?

• A (macabre but useful) way to think about this is with probate: if you die, will people fight over your money or your credit cards?
Dr. Tufte's ECON 2020 PowerPoint slides to accompany Colander's text. 13

13.D. Banks and the Creation of Money
• Is most of what we call money created by the (single) central bank, or by the (multitude) of private banks? • 13.D.1. How Banks Create Money
• 13.D.2. The Money Multiplier • 13.D.3. Faith as the Backing of Our Money Supply
Dr. Tufte's ECON 2020 PowerPoint slides to accompany Colander's text. 14

13.D.1. How Banks Create Money
• Can financial assets be created out of nothing?
– How is this related to financial liabilities?

• Currently, do banks in the U.S. create money?
– Do they create currency? – Could they? Have they?
Dr. Tufte's ECON 2020 PowerPoint slides to accompany Colander's text. 15

13.D.2. The Money Multiplier
• If you deposit money in a bank, is it always there?
– What happens to it?

• If someone else deposits money in a bank, can it be loaned to you?
– Does this affect the other person?

• What percent of deposits does a bank hold onto?
– How is this related to the money multiplier?
Dr. Tufte's ECON 2020 PowerPoint slides to accompany Colander's text. 16

13.D.3. Faith as the Backing of Our Money Supply
• Does money have to be backed by some other real asset?
• What is a fiat? What is fiat money? • If you write an IOU, it isn’t really money. Is that because:
– It isn’t backed by anything other than faith?

– It isn’t very liquid?
Dr. Tufte's ECON 2020 PowerPoint slides to accompany Colander's text. 17

13.E. Regulation of Banks and the Financial Sector
• What would happen if banks stopped creating asset/liability pairs?
• 13.E.1. Financial Panics • 13.E.2. Anatomy of a Financial Panic • 13.E.3. Government Policy to Prevent Panic • 13.E.4 The Benefits and Problems of Guarantees • 13.E.5 The Savings and Loan Bailout
Dr. Tufte's ECON 2020 PowerPoint slides to accompany Colander's text. 18

13.E.1. Financial Panics
• Did a bank ever refuse to let you withdraw your deposits?
– What would you do if they did?

• Should a bank be able to figure out how much cash it has to have on hand in order to avoid such problems?

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13.E.2. Anatomy of a Financial Panic
• When you deposit money in the bank, is it generally short-term or long-term?
• When you take out a loan is its term generally longer or shorter than your deposits? • Does this create a problem for banks?
Dr. Tufte's ECON 2020 PowerPoint slides to accompany Colander's text. 20

13.E.3. Government Policy to Prevent Panic
• Could a solvent bank be driven out of business by a panic that was not warranted?
– Is this in anyone’s interest?

• What programs has the government created to prevent this?

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13.E.4 The Benefits and Problems of Guarantees
• Is a bank “bluffing” when it says that you can get your money out when you demand it (Colander calls this an illusion, rather than a bluff)?
– If FDIC insures your deposits, is the bank still bluffing?
– Are you less likely to call the bank on its bluff if your deposits are insured?

• Do bank managers face a moral hazard?
Dr. Tufte's ECON 2020 PowerPoint slides to accompany Colander's text. 22

13.E.5 The Savings and Loan Bailout
• Was fraud a major cause of the S&L problems in the 1980’s?
• Did S&L managers fall prey to a moral hazard? How so?
– Did the government relax S&L regulations prior to the bailout? – Did this test or buttress the business morals of S&L managers?
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