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Economics 11 Unit 6
Money, Resources:
McConnell, C.R., Brue, S.L. and…
Economics 11 Unit 6
Money
Money Supply
Functions of Money
Medium of Exchange
- Used for buying and selling goods and services
- Allows society to escape the complications of Barter.
Unit of Account
- Commonly accepted unit to measure the relative worth of a wide variety of goods, services, and resources.
- Aids rational decision making by enabling buyers and sellers to easily compare relative values.
- Able to define debt obligations, determine taxes owed, calculate the nation's GDP, etc.
Store Value
- Enables transfer of purchasing power from the present to the future.
Alternative assets to Money/Cash:
- Real Estate
- Stocks
- Bonds
- Precious Metals (such as Gold)
- Collectible Items (such as fine art or comic book collections)
Liquidity = The ease with which an asset can be converted quickly into cash with little or no loss of purchasing power. (Only Cash is Perfectly Liquid.)
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Money Creation
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Profits, Liquidity and the Federal Funds Market
Banker's pursuit of 2 conflicting goals:
- Profit: The reason why banks make loans and buy securities (the 2 major earnings for a bank)
- Liquidity: Safety, specifically such liquid assets as cash and excess reserves. Bankers seek a balance between prudence and profit. (Assets earning higher returns vs. highly liquid assets with little to no returns.)
Federal Funds:
- Prior to financial crisis of 2007-2008
- Banks could loan money to and from other banks with excess funds at the Federal Reserve.
- Over night with a little bit of interest, called Federal Funds Rate
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Money Multiplier
(Also, chequeable deposit multiplier)
- Defines relationship between any new excess reserves in banking system and magnified creation of new chequeable deposit money by banks as a group.
- Exists because reserves and deposits lost by one bank become reserves and deposits of another bank.
- Magnifies excess reserves into a larger quantity of chequeable-deposit money.
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Higher reserve ratios mean lower money multipliers and therefore less creation of new chequeable deposit money via loans.
Reversibility: Multiple Destruction of Money
- Just as chequeable deposit money is created when banks make loans, chequeable deposit money is destroyed when loans are paid off.
Resources:
McConnell, C.R., Brue, S.L. and Flynn, S.M. (2021).Economics, 22nd edition. Chapters 34 and 35. Singapore: McGraw Hill Education
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