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What is MoneyThe Economics of Money, Banking, and Financial Markets, 8th edition
Frederic S. Mishkin
Why should I take this course?
For econ majors, this course relates to macroeconomics, international trade, and growth and development
For business majors, constantly will be confronted with financial decisions
For all other majors, we are all affected by the monetary system: you have checking accounts, will likely buy insurance, have mutual funds, etc.
The Globalization of Money, Banking, and Financial Markets
Changes in the diverse markets in which multinational firms operate affect the financial institutions that serve those firms.
The blending of domestic and global financial markets has increased international competition among financial institutions.
Money and Banking in the Digital Age
Cybertechnologies:Technologies that connect savers,
investors, traders, producers, and governments via computer linkages.
Money and Banking in the Digital Age
Implications of cyber technologies: Major changes for both banks and
their customers: more online banking, customers will have more services on their home computers Policymakers are affected: the nature
of money is changing, what kinds of new regulations will be needed?
Meaning of Money
Anything that is generally accepted in payment for goods or services or in the repayment of debt.
Distinct from income and wealth
Function of Money
Medium of ExchangeUnit of AccountStore of ValueStandard of Deferred Payment
The Desirable Properties of
Money
1. Portability2. Durability3. Divisibilty4. Standardizability5. Recognizability
Evolution of the Payments System
Commodity Money ->metal such as precious metal or another valuable commodity. The problem, is money , very heavy, hard to transport.
Fiat Money -> paper currency -> legal tender
Methods of Exchange and the Evolution of Money
Barter and the double coincidence of wants: Before money there was barter: trading
products for products. This requires a double coincidence of wants, which means two individuals are simultaneously willing and able to make a trade; we each have what the other wants.
Commodity money: A good with a nonmonetary value that is
also used as money.
Methods of Exchange and the Evolution of Money
Commodity standard: A money unit whose value is backed by
the value of another physical good such as gold or silver.
Fiat money: A token that has value only because it is
accepted as money. (most money today is fiat money)
Electronic money (e-money): Money that people can transfer
directly via electronic impulses.
Types of Money
I. Commodity Money a. Full-bodied money b. Representative full bodied money
II. A. Issued by Government and Central Bank 1. Token Money 2. Paper
B. Issued by Depository Institutions 1. Bank Notes 2. Demand deposits
Types of Money
Iron Boar tusk Playing cards
Copper Red woodpecker scalps Leather
Brass Feathers Gold Wine Glas Silver Corn Polished beads (wampum) Knives Salt Rum
Pots Horses Molasses Boats Sheep Tobacco Pitch Goats Agricultural implements Rice Tortoise shell Round stones with centers removed Cows Porpoise teeth Crystal salt bars Paper Whale teeth Snail shells
Cigarettes
Electronic Money : A Coming Global Phenomena
Electronic money is money that stored electronically and it takes several forms.
Debit CardsStored-Value CardElectronic cashElectronic Check’s
Commodity Money Standards
Purchasing power of money: The value of money in terms of the
amount of real goods and services it buys.
Gold standard: A monetary system in which the value of
money is linked to the value of gold. Bimetallic standard:
A monetary system in which the value of money depends on the values of two precious metals, such as gold and silver.
Commodity Standards
Gold bullion: Within a gold standard, the amount of
gold used as money. Monetary base:
A “base” amount of money that serves as the foundation for a nation’s monetary system.
Under a gold standard, the amount of gold bullion is the monetary base
In a fiat money system, the sum of currency in circulation plus reserves of banks and other depository institutions is the monetary base.
The Move to Fiat Money
After 1971, the U.S. renounced the gold standard. Other nations followed.In some countries that have
resorted to excess printing of money, this has led to high rates of inflation.
E-MoneyPerhaps the future of money, uses
microchips to store money values.Check out http://www.e-gold.com/
Money in Circulation: what do we count?
Liquidity:The ease with which an asset can
be sold or redeemed for a known amount of cash at short notice and at low risk of loss of nominal value.
Monetary aggregate:A grouping of assets sufficiently
liquid to be defined as a measure of money.
Measuring Money
M1, which includes currency, checking account deposits and travelers check.
M2, aggregate to M1 other assets that have money market deposit account and money market mutual find shares, small denomination time deposits, saving deposits, overnight repurchase agreement.
M3, monetary aggregate adds to M2 somewhat less liquid assets such as large denomination, term repurchase agreements, and institutional money market fund shares.
Measures of the Monetary Aggregates
M1= Currency (Transaction Approach}
Traveler’s cheks
Demand deposits
Other checkable deposits
Total M 1
M2 = M1 + ( The liquidity approach )
Small-denomination time deposits
Saving deposits and money market deposits accounts
Money market mutual fund shares (noninstitutional)
Total M2
M3 = M2 + Large denomination time deposits Money Market mutual fund shares Term repurchase agreements Term Eurodollars Total M3
The Monetary Base
Currency: Coins and paper money.
Depository financial institutions: Financial institutions that issue checking and
savings deposits that are included in measures of money and that legally must hold reserves on deposit with Federal Reserve banks or in their vaults.
Reserves: Cash held by depository institutions in their
vaults or on deposit with the Federal Reserve System.
Monetary base equals currency plus these reserves.
M1: A Basic Definition of “Cash”
M1: Currency, traveler’s checks, and
transactions deposits. Transactions deposits (checking
accounts): Demand deposits:
Non-interest-bearing checking accounts. Negotiable-order-of-withdrawal (NOW)
accounts: Interest-bearing checking deposits.
Automated-transfer-system (ATS) account:
An interest-bearing savings account and non-interest-bearing checking account.
Components of the Monetary Base and M1 ($ Billions)
M2: Cash Plus Other Liquid Assets
M2: M1 plus savings and small-denomination
time deposits and balances of individual and broker-dealer money market mutual funds.
Savings deposits: Interest-bearing savings accounts without set
maturities. Money market deposit accounts:
Savings accounts with limited checking privileges.
Small-denomination time deposits: Deposits with set maturities and denominations
of less than $100,000.
M2: Cash Plus Other Liquid Assets
M2: M1 plus savings and small-denomination
time deposits and balances of individual and broker-dealer money market mutual funds.
Savings deposits: Interest-bearing savings accounts without set
maturities. Money market deposit accounts:
Savings accounts with limited checking privileges.
Small-denomination time deposits: Deposits with set maturities and denominations
of less than $100,000.
The Components of M2 ($ Billions)
M1 $1,365.1
Small-denomination time Deposits 867.0
Savings deposits and money market deposits 3,574.8
Individual and broker-dealer money market mutual funds 707.8
M2 $6,514.7
M3: The Broadest Monetary Aggregate
M3: M2 plus large-denomination time deposits,
Eurodollars and repurchase agreements, and institution-only money market mutual funds.
Large-denomination time deposits: Deposits with set maturities and denominations
greater than or equal to $100,000. Repurchase agreements:
Contracts to sell financial assets with a promise to repurchase them at a later time.
Eurodollars: Dollar-denominated deposits located outside the
U.S.
The Components of M3 ($ Billions)
M2 $6,514.2
Large-denomination time deposits 1,203.4
Repurchase agreements and Eurodollar deposits 853.6
Institution-only money market mutual funds 1,039.3
M3 $9,611.0
Annual Growth Rates of M1 and M2.
Nonelectronic paymentsCurrencyCredit-cardMoney orders
Electronic paymentsWire transfers: Payments made via
telephone lines or through fiberoptic cables.
Money in the Digital Economy
Electronic versus Nonelectronic Payments
Money in the Digital Economy
Electronic Payments (cont’d) Automated clearinghouses:
Institutions that process payments electronically on behalf of senders and receivers of those payments.
Point-of-sale (POS) transfer: Electronic transfer of funds from a
buyer’s account to the firm from which a good or service is purchased at the time the sale is made.
Automated bill payment: Direct payment of bills by depository
institutions on behalf of their customers.
Money in the Digital Economy
Computer shopping
Internet-based financial exchanges
Innovations in electronic payments technology
As assets become more liquid, the meaning and measurement of “money” may change the composition of future monetary aggregates.