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MONEY - Coggle Diagram

- - - - Currency (coins and paper money)
        
        It is Token money- This means that the face value of any piece of currency is unrelated to its intrinsic value
        
        This is because people could destroy the currency inorder to sell them for their intrinsic value
        
        It is made up of coins and paper money circulating in the economy
      - Checkable deposit
        
        It can be converted into paper money and coins on demand
        
        Checks drawn on those deposits are thus the *equivalent of currency .
        
        Institutions That Offer Checkable Deposits
        
        Commercial banks
        
        Are the primary depository institutions.
        
        accept the deposits of households and businesses,
        
        keep the money safe until it is demanded via checks
        
        In the meantime use it to make available a wide variety of loans
        
        Thrift institutions
        
        made up of Savings and loan associations, mutual savings banks, and credit unions
        
        supplement the commercial banks
      - Two Qualifications
        
        Currency held by the Central banks, commercial banks, and thrift institutions is excluded from M1 and other measures of the money supply.
        
        By excluding currency held by banks when determining the total supply of money, we avoid this problem of *double counting.
        
        Any checkable deposits of the government (specifically, the Treasury) that are held by commercial banks or thrift institutions is excluded from M1 and other measures of the money supply.
        
        Enable a better assessment of the amount of money available to the private sector for potential spending
    - - M1= Currency + Checkable deposits
      - Near-monies
        
        Small-denominated (less than $100,000) time deposits
        
        Money market mutual funds held by individuals
        
        Savings deposits, including money market deposit accounts
- - - - Currency and checkable deposits are money because people accept them as money.
        
        They perform the basic function of money .i.e. They are acceptable as a medium of exchange.
    - - *Confidence in the accepting a a medium of exchange paper money is strengthened because the government designated currency as legal tender
        
        This means it is a valid and legal means of payment of any debt.
      - The government has never decreed checks to be legal tender but they have insured that individual can deposits a certain amount at commercial banks and thrifts.
        
        That fact increases the willingness to use checkable deposits as a medium of exchange.
    - - The value of money depends on its supply and demand
        
        Money derives its value from its scarcity relative to its utility
        
        The utility of money lies in its capacity to be exchanged for goods and services, now or in the future.
  - - - This is the amount of goods and services a unit of money will buy.
        *The amount money will buy varies inversely with the price level.
        
        Higher prices lower the value of money because more money is needed to buy a particular amount of goods, services, or resources and vice versa.
    - - When money rapidly loses its purchasing power, it loses its role as money .i.e. as a medium of exchange.
        
        This is called runaway inflation, or hyperinflation and it happens when the government issues so many pieces of paper currency that the purchasing power of each of those units of money is almost totally undermined
        
        People may simply revert to barter
      - Stabilizing Money’s Purchasing Power
    - - Since the purchasing power of money and the price level vary inversely, stabilization of the purchasing power of a nation’s money requires stabilization of the nation’s price level.
      - Such price-level stability (2 to 3 percent annual inflation) mainly necessitates intelligent management or regulation of the nation’s money supply and interest rates (monetary policy). It also requires appropriate fiscal policy supportive of the efforts of the nation’s monetary authorities to hold down inflation
- - - - Commercial banks accepts deposits and grant loans to borrowers.
        
        Generally they grant loans if the borrower has fine reputation and financial soundness and is convinced of its ability to repay the loan
      - Checkable deposits are bank debts in the sense that they are claims that banks and thrifts promise to pay “on demand.”
      - Factors that limit the ability of a commercial bank to create checkable deposits by lending
        
        an individual commercial bank cannot lend an amount greater than its excess reserves
      - When a bank makes loans, it creates checkable deposit that are money.They convert IOUs, which are not money, into checkable-deposits, which are money.
    - - Commercial banks can also create money by using its excess reserves to purchase bonds from the public
        
        Banks create checkable-deposit money.when they credit the checkable-deposit accounts of the bond sellers.
        
        This increase the supply of money in the same way as lending to the public does.
      - In contrast, the selling of government bonds to the public by a commercial bank reduces the supply of money
    - - GOALS OF COMMERCIAL BANKS
        
        PROFIT-
        
        Commercial banks seek profits, which is why the bank make loan and buy government securities
        
        They earn interest by making loans and by purchasing bonds
        
        Liquidity
        Safety for a bank, lies in liquidity, specifically such liquid assets as cash and excess reserves
        
        They maintain liquidity by holding cash and excess reserves