1. Money and Banks

2. I. What is Money? Root of all evil; money is debt –And all that is good: how do you think Brangelina got to look like that? 1) Medium of exchange (bartering sucks*) 2) Unit of account (relative worth: one computer = 1,324 Big Macs?) 3) Store of value (liquid, but no returns) Form irrelevant: anything generally accepted as a medium of exchange is money

3. Characteristics DurabilityPortabilityDivisibilityUniformity Limited Supply Acceptability

4. Types of Money (Source of Value) Commodity money Representative Fiat money –Legal tender

5. M1 Public’s currency –Token money: intrinsic value < face value Coins: 2-3% of M1; Federal Reserve Notes: 37% All checkable deposits (not CDs or savings accounts) –Largest component M1 –Commercial banks, Thrifts (S+Ls, mutual savings, credit unions) NOT currency/deposits owned by gov’t/financial institutions –Double counting M1= $3.1 trillion (2016)

7. M2 M1 + Near-monies 1) noncheckable savings accounts 2) Money Market Deposit Account (MMDA) 3) Small time deposits (<$10,000; CDs, etc.) 4) Money Market Mutual Fund M2= $12.5 trillion (2016)

9. II. Money Creation Fractional reserve system Required reserves: an amount of funds equal to a specified percentage of the bank’s own deposit liabilities (either as vault cash or in Fed district bank) –Purpose is to give Fed control over banks’ lending decisions, and thereby M Reserve ratio = required reserves / demand- deposit liabilities Excess reserves = actual reserves – required Money Multiplier: 1/RRR Excess reserve x m= maximum money creation Depends on willingness and ability to lend full amount