1. Money. Money Supply and Money Demand Frederick University 2014 11:091

2. Money & the Payments System meaning of money functions of money forms of money measuring money meaning of money functions of money forms of money measuring money

3. 11:093 without money barter for stuff -- need “double coincidence of wants ” -- inefficient: more time shopping, less time producing

4. 11:094 example I have exam 2, want to trade it for soda

5. 11:095 You have to want the exam & be willing to give up soda AND I have to want the soda & be willing to give up exam

6. 11:096 double coincidence of wants

7. 11:097 The Meaning of Money anything commonly accepted in exchange for goods/services many objects throughout history

8. 11:098 examples livestock shells metals cigarettes

9. 11:099 to act as money, must be measurable divisible widely accepted durable

10. 11:0910 Forms of Money commodity money has its own value as a good -- gold & silver coins

11. 11:0911 Paper money - a substitute for the commodity money - freely convertible

12. 11:0912 credit money (fiat money) -- no value other than fact that it’s accepted in exchange for goods and services

13. 11:0913 Our money is fiat money! NOT backed by gold coins do not contain silver or gold

14. 11:0914 fiat money is more efficient commodity money has opportunity cost: you could use it for something else

15. 11:0915 debit or credit cards? NOT money payment mechanisms

16. 11:0916 money, income, & wealth money what is accepted as payment income earnings during time period (year) wealth accumulated assets at a point in time

17. 11:0917 money, wealth are STOCKS amount at a point in time income is a FLOW amount during a time period

18. 11:0918 examples I own € 2 million in diamonds. I am wealthy I have no money

19. 11:0919 I win € 25 million in lottery I put it under my bed I quit my job I am wealthy I have a lot of money my income is zero

20. 11:0920 software engineer earnings € 100,000/yr blows it all, every paycheck high income no wealth

21. 11:0921 Functions of Money money is a means of payments (medium of exchange) -- accepted as payment for goods and services -- main function of money

22. 11:0922 money is a unit of account -- money is used to measure value

23. 11:0923 if something costs €5, not that valuable if something costs € 500, that’s valuable

24. 11:0924 money is a store of value -- use money to save, accumulate wealth, buy stuff later -- money is liquid asset

25. 11:0925 money is NOT always a good store of value -- political instability -- poor economy -- high inflation

26. 11:0926 example Historically, the U.S. dollar has been a good store of value but when the $ started falling in value, this changed…

27. 11:0927 Measuring Money How much money do we need? The quantity of money (money supply) depends on the value of goods and services that will be bought … = P x Q

28. 11:0928 Measuring Money and on the velocity of money circulation = the number of transactions, served by the same money asset (V)

29. 11:0929 example I buy from George coffee with a €2 coin George buys from Maria a newspaper with the same €2 coin Maria buys from Sofia a sandwich with the same €2 euro coin One and the same €2 coin serves 3 transactions Therefore, for these transactions we do not need €6 but only €2 The velocity of circulation (V) is 3 The greater the velocity, the smaller the quantity of money needed.

30. 11:0930 The quantity of money M = (P x Q) : V or MV = PQ

31. 11:0931 Measuring Money Money aggregates amount of cash (coins and banknotes) BUT other forms of money too (quasi - money

32. 11:0932 M1 (h igh power money) = currency in circulation (cash) + demand deposits + checkable deposits + traveler’s checks

33. 11:0933 M2 = M1 + savings deposits + small time deposits

34. 11:0934 Comparing measures get larger M1 < M2 add less liquid assets to larger measures

35. 11:0935 Which measure is best? move together in general BUT behavior can vary in short-term M2 most watched

36. 11:0936 Money Demand Money demand – the quantity of liquidity that the public would like to hold at every level of the interest rate, ceteris paribus

37. 11:0937 Motives for money demand  Transactionary to pay purchases

38. 11:0938  Precautionary because of the possible lack of synchronization of payments

39. 11:0939  Speculative (liquidity preference) because holding money has an opportunity cost money has time value – it may bring interest on the one hand, people are motivated to have liquidity, on the other hand, they want extra income (interest) … when the interest rates fall, people will be willing to convert part of their interest bearing assets into liquidity … when the interest rates increase, the liquidity preference diminishes.

40. 11:0940 Equilibrium on the Money Market i M/P MS MD

41. 11:0941 Factors, Determining Money Demand Nominal GDP Current transactions Expectations Frequency of payments Synchronization of payments Wealth

42. 11:0942 Financial Institutions Banking institutions:  The Central bank  Commercial Banks Nonbanking:  Insurance funds  Pension funds  Investment funds  Mortgage funds  Brokering houses  Mutual funds

43. 11:0943 Commercial Banks The Balance sheet of a commercial bank liabilities assets depositsloans reserves

44. 11:0944 The Money Tree Deposit Multiplier – Maximum increase in money supply as a result of the increase in the reserves of the banking system

45. 11:0945 The Deposit Multiplier € 1000 new reserves enter Commercial Bank “А” Reserves (safety) Loans (income) 200 800 160 640 128 512 1000 + 800 + 640 + 512 + … DM = ΔD/ ΔR

46. 11:0946 The Central Bank Functions: Control on money supply Supervision of Commercial Banks Banker of the government Providing cash Lender of last resort Monetary policy Control on reserves Foreign currency policies and external payments

47. 11:0947 The Central Bank Central Bank Liabilities: Coins and notes Deposits of the CBs Assets: Foreign currency Government bonds Loans to the Treasury and to CBs