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ch27

VIEWS: 7 PAGES: 23

									        What is money?
• The set of assets in the economy that
people use regularly to buy goods and
services from other people is called
money
• Every economic transaction, for a good, a
   service or a factor involves a buyer, a seller
   and an agreed means of payment for the
   transaction
   • Anything that the sellers of goods, services
   and factors accept as payment against what
   they sell is by definition money


• Throughout history, as specialisation in
   production
   created exchange, money and monetary
       Functions of money
Money has three functions in the
 economy
 – A medium of exchange
 – A unit of account
 – A store of value
•A medium of exchange is anything that is
readily
acceptable as payment

•A unit of account is the yardstick people use
to
post prices and record debts

•A store of value is an item that people can
use to
transfer purchasing power from the present to
the
               Fiat Money
Fiat money is used as a medium of exchange
because of a government decision

Fiat money has no intrinsic value
•
The paper and printing costs of a banknote or
  the
metal value of a coin are negligeable
•
In Turkey, we must accept the coins and
  banknotes
                  Liquidity

A key concept to understand money is liquidity
Liquidity is the ease with which an asset can be
converted into the economy’s medium of
  exchange

By definition, money is the most liquid asset:
Any banknotes in our pocket needs not to be
  converted into anything to be used for
  payment
 Definition of Money
             M1
Currency + Checking Deposits
 (in the hands of the public)
M2: M1+ “small” time deposits
M3: M2 + “large” time deposits
TC MERKEZ BANKASI ELEKTRONİK VERİ DAĞITIM SİSTEMİ

Para Arzı ile Bankaların ve Banka Dışı Kesimin Mevduat Benzeri Yük. (Aylık, Milyar TL)

Orijinal Frekans,SABİT,Orijinal Gözlem




TP.PG.B01 TP.PG.B02 TP.PG.B03 TP.PG.B04 TP.PG.B05
10-2002 14580630.6000 57924440.6000 128458141.7000 62375439.2000 132909140.3000
11-2002 14836343.3000 58874391.3000 125324215.8000 64827249.2000 131277073.7000
SEÇİLEN SERİLERİN AÇIKLAMALARI ==============================
TP.PG.B01: M1 TP.PG.B02: M2 TP.PG.B03: M2Y TP.PG.B04: M3 TP.PG.B05: M3Y
The Central Bank
During the 20th century, as fiat money became
widespead, countries gave the monopoly to print
banknotes and mint coins to a public institution
called the Central Bank
Before the Republic, Osmanlý Bankasý,
a private bank, had the charter to issue currency
Türkiye Cumhuriyet Merkez Bankasý (TCMB)
was established in 1930 and started operations
  in 1932
In the US, the Federal Reserve Board
with 12 Federal Reserve Banks fulfills the
  functions of the central bank (established in
  1913)
   Responsibilities of the CB
The Central Bank plays a very important role in
every economy
    CB oversees and regulates the banking sector
In Turkey this function was recently transferred to
The Banking Regulation Agency (BDDK)
    CB acts as a banker’s bank, making loans to the
banks as a lender of last resort
    CB acts as the Government’s bank
    CB conducts monetary policy by controlling the
money supply and determining the short run
nominal interest rates
    CB holds the official foreign exchange reserves
Of the country
      Organisation of TCMB


General Assembly (Genel Kurul) constitutes of
 shareholders (government) and meets
 annually

CB Board (Banka Meclisi) is elected by the
General Assembly to run the CB

The Governor (Guvernör or Ba º kan)
is the chief executive officer of the CB, elected
   directly by the Government for 5 years
Monetary Policy Board (Para Politikasý
 Kurulu) has been established recently to
 conduct monetary policy.

TCMB is legally independent of the
 government to pursue price stability
            Money Creation
•The Balance Sheet of the CB summarises
monetary developments in the economy
• Assets and liabilities of the CB are either in
   foreign
exchange or in the currency issued by the CB
• Gold and the foreign exchange holdings of the
   CB
constitute its international reserves
• Local currency assets are usually T- bills
• Banknotes issued by the CB are called
   currency in
circulation
   Fractional reserve banking
Banks can influence the quantity of demand
deposits in the economy and therefore the
   money
supply
• If banks hold a fraction of the money
   deposited as
reserves and lend out the rest, we have a
   fractional
reserve banking system
• Reserves are deposits that banks have
   received but
have not loaned out (kept as banknotes or
   deposits
           Money Creation

Interactions among 3 groups
  Consumers
  Banks
  Central Bank
          Money Creation
Deposit cash in an account at Bank A
no change in the money supply

Definition of Money:
Currency + Checking Deposits
in the hands of the public
Depositing the “cash” caused a change in the
  composition of the money supply:
5Checking Deposits
&
Currency
Bank A is required to keep some of your
  deposit in reserve.
Assume “r” = 10%
Bank A has required reserves of $10,000
&
excess reserves of $90,000
(which can be lent out)
Suppose Mehmet Bey borrows $90,000 from
  Bank A to buy a home from Big
  Construction Company
Bank A writes a check to Big Construction for
  $90,000.
Big Construction Company deposits
the check in the company account
at Bank B...
As soon as the check is deposited, the Money
 Supply increases by $90,000!

Why?
Currency + Checking Deposits
(in the hands of the public)
Checking Deposits 5 by $90,000
Bank B has required reserves of $9,000
& excess reserves of $81,000
(which can be lent out)
This process continues until banks have their
desired levels of excess reserves.
The maximum increase in the money supply
  that can
occur is:
1/r * initial change in Ex. Res.
(at Bank A)
With the deposit of $100,000 in cash, the M S
  can increase by a maximum of $900,000!
Actual increase may be less than the max due
  to:
1. Individuals hold currency
2. Banks hold excess reserves

								
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