Money

Types of Multiple Deposit Expansion Question

Type 1: Calculate the initial change in ER

-aka. the amount a single bank can loan from the initial deposit

Type 2: Calculate the change in loans in the banking system

Type 3: Calculate the change in the money supply

-Sometimes Type 2 and Type 3 will have the same result (i.e. no Fed involvement)

Type 4: Calculate the change in DD

Functions of the FED

1. It issues paper currency
2. Sets RR and holds reserves of banks
3. It lends money to banks and charges them interest
4. They are a check clearing service for banks
5. It acts as a personal bank for the government
6. Supervises member banks
7. Controls the money supply in the economy

Uses of Money

1. Medium of Exchange
• Serves to trade one product to another
2. Unit of Account
• Establishes economic growth
3. Store of Value
• Money holds it's valued over a period, whereas products may not

Types of Money

1. Representative Money
• Paper money is backed by something tangible that gives its value.
• Example: IOU
2. Commodity Money
• Gets its a value from the type of material from which it's made
• Example: Gold, silver
3. Fiat Money
• Money because the government says so

Characteristics of Money

1. Durability
2. Portability
3. Divisibility
4. Acceptability
5. Uniformity
6. Scarcity
7. Limited supply

Money Supply

• M1
• Currency(coins of cash)
• Checkable Deposits -> Demand Deposits -> Checking accounts
• Traveler's checks

Liquidity- easily to convert to cash

• M2
• Consists of M1 money +
• Savings accounts +
• Money market accounts

-Not as liquid

-Saving

• M3
• M2 + Certificates of deposit

Time Value of Money

v = future value of $

p = present value of $

r = real interest rate (nominal rate - inflation rate) expressed as a decimal

n = years

k = number of times interest is credited per year Simple Interest Formula: v = (1+r)^n * p

The Compound Interest Formula: v = (1+r/k)^nk *p

Balance/Business Sheet

-Summarizes the financial position of the bank at a certain time

-The value of assets must equal liabilities.

Assets (Left side)

• Required Reserves (RR)
• Excess Reserves (ER)
• Bonds
• Loans
• Property

Liabilities (Right side)

• Demand Deposits
• Owner's Equity
• Net worth

Owner's Equity- 

Based on how much you invested into stock

Net Worth- What you've earned

Money Creation

-Putting new money into circulation

2 Ways

1. When the Fed buys bonds from the public or from a financial institution (OMO, Open Market Operation)
2. When the banks make loans to the public

-The money supply is increased when banks make loans.

-The more loans banks make, the more money there is in circulation.

-A bank can loan any amount that is in excess of its required reserves.

-The banking system can create loans in multiples of an original loan

-Reserves of total reserves are the number of deposits that a bank has accepted but not loaned out.

-Required Reserves- are the amount a bank must keep on hand by law

-The RRR(Required Reserve Ratio) determines this amount

-Banks make money off interest.