XIII -- 1 Econ 202 Topic: Chapter #13, McConnell & Brue Money and Banking I. Characteristics of any Modern Economy 1. Large amount of real capital
2. Much division of labor--specialization
3. Use of fiat money.
II. Money Definition Anything that is readily acceptable in payment for resources, goods, and payment for debts. services, or in
1. Money is a social convention.
2. Money is debt of the U.S. Treasury and commercial banks.
III. Types of Money 1. Commodity (1) Things that have "use" value (2) Problems with commodity monies (a) may deteriorate (b) may not circulate (c) often inconvenient (d) high storage cost (e) changing value as commodity price changes
XIII -- 2 (3) Examples of commodity monies (a) salt (b) beads (c) gold (d) silver (e) copper (f) cows 2. Fiat Money (1) Defined by society in which it is used.
(2) Has no intrinsic or use value other than for use as money
(3) Major components of fiat money (a) paper bills
(4) Problems with fiat money (a) subject to abuse by monetary authority
(c) control of supply
XIII -- 3 IV. Factors that give fiat money value 1. Acceptability -- because it performs the functions of money (1) Functions: (a) medium of exchange (b) measure of relative value (c) store of value
2. Legal Tender -- it's the law (1) Creditors must accept it
(2) Government must accept for payment of taxes
3. Relative scarcity (1) Scarce relative to usefulness
(2) Purchasing power determined by quantity available
V. Maintaining Money's Value
1. Use appropriate fiscal policy (government spending and taxing)
2. Maintain effective control over money supply (appropriate monetary policy)
3. Separate money supply control from political influence
XIII -- 4 VI. History of Development of Modern Fiat Money 1. Goldsmith's receipts 2. Early world wide trading companies issued receipts. 3. In U.S., states issued money--caused lots of confusion and trade problems. 4. Need for centralized banking system in U.S.--Federal Reserve System, 1913. 5. Every "modern" economic system has some type of Central Bank.
VII. Money Serves the Following Functions 1. Medium of Exchange (1) Conduct transactions (2) Purchase things
2. Measure of relative value or unit of account (1) Use to make comparisons in terms of dollar prices
(2) Use to assess changing net worth
(3) Use to assess wage level versus goods prices
3. Store of Value (1) People hold wealth in dollar balances
(2) Money is a very liquid asset
XIII -- 5 VIII. United States Money Supply 1. Money is debt or a promise to pay.
2. Money supply components (1) M1 = Currency and checking deposits (demand deposits) (2) M2 = M1 plus (a) noncheckable savings accounts (time deposits)
(b) small (< $100,000) certificates of deposits
(c) government bonds, promissory notes (easy to convert to dollars)
(3) M3 = M2 plus (a) large (> $100,000) certificates of deposits
3. U.S. Money Supply (2003) (M2) = $6.09 Trillion
4. Near Money (1) These do not function as a medium of exchange but can quite readily be converted to M1 (money)
XIII -- 6 (2) Examples of near money (a) Saving deposits
(b) Government bonds
(c) Warehouse receipts
(d) Certificates of deposit (CDs)
Other Forms of Payment for Goods and Services 1. Credit cards -- not money. Really a short-term loan
2. Debit cards -- used to subtract cost of purchase from a money account
3. E-money (electronic money) -- accounts handled entirely over electronic networks
4. Private money -- payments made using some local payment methods
X. Demands for Money (Why people hold money) 1. Transactions demand (Dt) -- Medium of Exchange (1) Demand for money to make purchases
(2) Amount demanded is function of price level and level of economic activity
XIII -- 7 2. Asset demand (DA) -- Store of value and earning asset (produces interest) Transaction Demand + Asset Demand = Total Demand (Dm)
Xl. Federal Reserve System 1. Institution through which U.S. manages money supply
2. Primary function is to regulate money supply
3. Structure or organizational makeup
XIII -- 8 Federal Reserve System
XIII -- 9 XII. Functions of the Federal Reserve System (Bankers' Bank)
1. Hold reserves of member banks
2. Provide for "clearing" of checks
3. Supply economy with coins and paper money
4. Act as fiscal agent for U.S. Treasury
5. Supervise member banks (conduct audits)
6. Regulate the supply of money in economy to promote price stability, economic growth, and full employment.
XIII -- 10 Example: If have a recessionary gap, the federal reserve may increase money supply.