1.  Anything of value owned by firms and households. Assets

2.  Anything of value owned by firms and households.  Financial Assets are ‘instruments’ of value bought and sold in financial markets. Assets

3.  What do financial markets do?  Transfer savings to borrowers,  Companies access financial resources to invest, meet payroll, and develop new products.  Players: individuals, organizations and everybody are key players in the financial markets. Financial Markets

4.  Let’s take a closer look at this market. Money Market  Financial Markets Bond Market Equities Market Financial Asset Markets

5.  Let’s take a closer look at this market. Money Market No interest  Financial Markets Bond Market Equities MarketInterest Financial Asset Markets

6. Goods and Money Markets

7. Money Market  What is money? Without it, modern economies could not function

8.  No Money: Barter Economy (goods for goods)  Money as a medium of Exchange: GoodsMoney Goods.  How did all start? (shells, barley, peppercorns, gold, and silver)  Precious metals, (Metals objects were introduced as money around 5000 B.C. By 700 BC, the Lydians became the first in the Western world to make coins.)  Historical Development of Money

9. History of money  Precious metals, (Metals objects were introduced as money around 5000 B.C. By 700 BC, the Lydians became the first in the Western world to make coins.)  Standardized amounts, e.g. 10 grms of gold, eg.Ephesus, Lydia, 650 BC.[2] Ancient India 6th century BC.  How? hammering, milling (pressing) or casting.  This is called MINTING technology.  Lydian Coin (Western Turkey), 700-637 B.C.

10.  Precious metals, (Metals objects were introduced as money around 5000 B.C. By 700 BC, the Lydians became the first in the Western world to make coins.)  Paper money (fully) backed by gold,  Paper money fractionally backed by gold,  Fiat money, Chinese note 1368-1399 (size of a sheet of notebook paper) History of money

11. 1.Acceptable 2.Standardized quality (diamonds, clear or not) 3.Durable (fish, strawberry, do they last) 1.Valuable relative to its weight (cement, stones) 2.Divisible (diamonds, pay for bread) Properties of a Good Medium of Exchange

12. 1) Medium of Exchange 2) Unit of account 3) Store of Value New York Note, 1776 4) Standard of deferred payments Precious metals are easily divisible into standardized coins and do not loose value when made into smaller units : COINS The Functions of Money

13.  Coins,  “Bank Notes” start of Paper money,  Fully backed by gold.  Fractionally backed by gold, ... later...  Fiat Money What is the supply? (more efficient) Initial stages of development of paper money

14.  Precious metals, (Metals objects were introduced as money around 5000 B.C. By 700 BC, the Lydians became the first in the Western world to make coins.)  Paper money (fully) backed by gold,  Paper money fractionally backed by gold,  Fiat money, Chinese note 1368-1399 (size of a sheet of notebook paper) History of money

15.  Using standardized coins or paper bills made it easier to determine prices of goods and services,  the amount of money in the system also plays an important role in setting prices of goods and Price Level of an economy.  Percentage changes in the price levels Inflation or deflation Why is money important?

16. Delegated to Central Banks Money Supply

17.  Money supply (M1) Currency (in circulation) + demand deposits (TL and Foreign Currency) 309,631,666,100 TL on 16 th of October 2015  Money supply (M2) M1 + Time deposits (TL and Foreign Currency) 1,201,033,332,400 TL on 16 th of October 2015 Money Supply Today

18. M1 and M2 in Turkey

19. US Money Supply

20.  YES!!!  HOW?  With some tools known as monetary policy tools. (Tools are instruments that a policy maker can change in order to influence the workings of an economy) Can the Central Bank change MS?

21. 1.Discount Rate, 2.Reserve Requirement ratio, 3.Open Market Operations. How do they work? Need to look at how banking system work and money changes hands… Monetary Policy Tools

22.  Banks are profit seeking institutions.  They accept deposits,  They give loans  Public Banks (Ziraat, Halk …) and Private banks (IsBank, Akbank, Garanti …) Commercial Banks and creation of Deposit Money

23. AssetsLiabilities ReservesDeposits LoansShort and long term borrowing Building and EquipmentOther Liabilities Other Assets Total Liabilities Stock holders equities Total AssetsTotal liabilities + stock holders’ equities Commercial Banks Balance Sheets

24.  Hold the required reserve ratio determined by Central Bank. If required reserve ratio (rr) is 15%, then in equilibrium (Reserves/ Deposits)*100 ratio=15 %. e.g. If Total Deposits are 2000 billion TL, then reserves need to be 300 billion TL. (Reserves/ Deposits)*100 ratio=(300/2000)*100=15 % Rules that commercial banks follow:

25. A new deposit comes into Bank One Change AssetsChange Liabilities Reserves +1000Deposits +1000 Loans Total Assets +1000Total Liabilities +1000

26. (Reserves/deposits)*100= 15 %. Result: Creates a new loan equal to 850. Bank One uses this new deposits in giving out new loans Change AssetsChange Liabilities Reserves + 150Deposits +1000 Loans + 850 Total Assets +1000Total Liabilities +1000

27. Change AssetsChange Liabilities Reserves +850Deposits +850 Loans Total Assets +850Total Liabilities +850 The new loan comes back to Bank Two Change AssetsChange Liabilities Reserves +127.5 (850*0.15)Deposits +850 Loans +722.5 (850*0.85) Total Assets +850Total Liabilities +850 New loans of 722.5 TL are created by Bank Two

28.  Total change in the deposits: 1000+ (0.85*1000)+(0.85*1000) 2 +(0.85*1000) 3 +… (0.85*1000) ∞  Total change =  Change in total deposits=  Money Multiplier= This will repeat ∞ times

29. Money supply  Money market  Tools to increase the MS 1)Discount rate increase, 2)Reserve requirement ratio decrease, 3)Open Market Operations (Buy bonds) I Q of money

30. Money demand  Money market  Types of Money demand 1)Transaction demand, 2)Speculative demand, 3)Precautionary demand,  MD= L(Y, i) or  MD= 5*Y – 3*i I Q of money

31. Money demand  Money market  If Y increases, then MD curve shifts to the right  MD= L(Y, i) or  MD= 5*Y – 3*i I Q of money

32. Money market equilibrium  Money market MS=MD  Money supply MS= 1000  Money demand MD= L(Y, i) or MD= 5*Y – 3*I (For a given Y level you will be able to determine equilibrium interest rate) I Q of money

33. Money market equilibrium  Money market MS=MD  Money supply MS= 1000  Money demand MD= L(Y, i) or MD= 5*Y – 3*I (For a given Y level you will be able to determine equilibrium interest rate) I Q of money

34. AssetsLiabilities FX and Gold ReservesCurrency in Circulation GovernmentRequired Reserves Open Market OperationsFree Reserves OtherCapital Central Bank Balance sheet

35. Central Bank (TCMB) Balance Sheet

36. Central Bank

38.  Equilibrium in 1. GOODS and SERVICES Market and 2.MONEY Market (Demand side of the economy) Determination of output

39. Goods and Money Markets

40. What is in the model? GOODS MARKET  The AE d = Y equality  Other variables: C d, I d, G d, NX d, T, YD, ------------------------------ IS Curve MONEY MARKET  MD=MS equality  Other variables: Y, i -------------------------------- LM Curve

41. IS – LM model  Goods market  Money Market i Y i Y IS LM

42. IS curve

43.  Equilibrium in both markets IS-LM equilibrium i Y IS LM

44.  Expansionary Monetary Policy IS-LM equilibrium i Y IS LM

45.  Expansionary Fiscal Policy: IS-LM equilibrium i Y IS LM

46.  See class notes and homework assignment Mathematical model of the IS-LM