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MONEY, MONEY Fractional Reserve Systems, Interest Rates & Equilibrium…

- - - - 12 Federal Reserve Banks
        Implement the decision of the Board of Governors
        
        Interact but do not compete with
        
        Commercial Banks
        Serves the Public
        (Household & Businesses)
        
        3/4 are State Banks
        i.e. Chartered by
        individual states to operate
        within their state borders
        
        1/4 are Federal Banks
        i.e. Chartered by
        the Federal Government
        to operate nationally
        
        Interact but do not compete with
        
        Thrift Institutions
        Serves the Public
        (Household & Businesses)
        
        Mutual Savings Banks
        
        Credit Unions
        Closely monitored by the National Credit Union Administration (NCUA)
        
        Savings & Loan Associations
        
        Regulated by Agencies Separate and apart from the Board of Governors and the Federal Reserve Bank
        
        Also subject to Monetary control
        by the Federal Reserve System
        
        Serves as the U.S. Central Bank
        
        Serves as the Bankers Bank
        
        Reserve Balances
        Accepts deposits from
        Commercial Banks & Thrift Institutions
        
        Make loans to
        Commercial Banks & Thrift Institutions
        
        Quasi-Public banks -
        that blends private ownership
        & public control
        
        Each Federal Reserve Bank is owned by the Private Commercial Banks in its district
        
        Public Institutions - Not motivated by Profit
        
        Policies they follow are ONLY to promote the well-being of the Economy as a whole
        
        Do not compete with Commercial Banks
    - - Serves as aid to the
        Board of Governors and the
        12 Federal Reserve Banks
      - Conduct Monetary Policy
      - Made up of 12 Individuals
        
        7 Members of the Board of Governers
        
        President of the New York Federal Reserve Bank
        Conducts the Open-Market Operations - To direct purchase and sale of government securities (bills, notes & bonds) in the open market
        
        4 Presidents selected from the remaining Federal Reserve Banks (each serving on a one-year rotation)
- - - - The Transactions of Demand for money
        To facilitate purchases (transactions)
        
        Nominal GDP is the main determinant of the amount of money demanded for transactions
        
        Independent of the Interest rate
        
        = Horizontally adding the transactions demand for money (Dm) to the asset Demand for money (Da)
        
        Transaction of demand is VERTICAL
        
        Combining the money supply (Sm) with the total money demand (Dm) = Market for money AND determines the EQUILIBRIUM INTEREST RATE (Ie) Intersection o Sm & Dm
        
        Total demand for money
        Dm = Dt+Da+Sm
      - The Asset Demand for Money
        To hold as an asset (store of value)
        
        Varies Inversely with the Interest rate because of the opportunity cost involved in holding currency & checkable deposits that pay no/very low interest
        
        Transaction of asset demand is DOWNWARD SLOPING
- - - - Coins/Paper money in
        the hands of the public
        
        PAPER MONEY
        
        Paper money is the
        CIRCULATION of DEBT of the
        Federal Reserve Banks
        
        Have NO INTRINSIC VALUE
        
        Government WILL NOT redeem paper money for anything tangible, such as GOLD
        
        Provided by the U.S. Bureau of Engraving and Printing
        
        COINS
        
        Have LESS INTRINSIC VALUE than THEIR FACE VALUE
        
        Provided by the U.S. Mint
      - Token Money - Face value is unrelated to its intrinsic value (value of the physical material). Face value IS ALWAYS MORE THAN intrinsic value
      - Supply is determined by the U.S. Dept of Treasury & the Federal Reserve System
    - - Checks of any size can be drawn at any time and as often as desired
      - Supplied by Commercial banks and Savings institutions
      - Safe & convenient
      - Can be easily converted to CASH when paid into a bank account through withdrawal
      - Checkable Deposits are the Debts of Commercial Banks & Thrift Institutions
      - Have NO INTRINSIC VALUE
      - Created by Loan Officers
    - - Including Checkable Deposits held at Credit Unions/Thrift institutions (DEMAND DPOSITS AKA NOW ACCOUNTS) AND
        Savings Deposits held at Commercial Banks/Thrift institutions
  - - - Only become available at their maturity
      - Certificate of Deposit (CD)
        Severe penalties when cashed before maturity
    - - Money Market Mutual Fund (MMMF)
      - Includes ONLY accounts held by Individuals
      - EXCLUDED :forbidden: Business & Other Institutions
  - - - Debt
        
        Promises to Pay
        
        Paper money
        Circulating debt of the
        Federal Reserve Banks
        
        Checkable Deposits
        Debts of commercial banks
        & thrift institutions
      - Value of Money
        
        1. Acceptability
        Currency & Checkable deposits
        are an acceptable medium of exchange
        Confident that they can be exchanged
        for goods, services and resources
        
        2. Legal Tender
        Confidence is strengthened because the government has designated currency as legal tender
        Paper money is valid and legal as a means of paying any debt
        NOT ALWAYS FOR PAYMENTS OF GOODS & SERVICES
        
        3. Relative Scarcity
        Depends on its Supply and Demand
        Derives its scarcity relative to its utility
        Its capacity to be exchanged for
        goods and services, now or in the future
        Economy's demand for money = Total Dollar Volume of transactions in any period + Amount of money saved by individuals & businesses for future transactions
        Supply of money = Purchasing Power
      - Money & Prices
        
        Purchasing Power of the DOLLAR($)
        Amount of goods & services a unit of money will buy
        RECIPROCAL RELATIONSHIP
        CPI (Consumer Price Index) INCREASES;
        Value of Dollar DECREASES
        $V = 1/P :check:
        
        Inflation and Acceptability
        HYPERINFLATION
        Happens when government issues so many pieces for paper currency that the purchasing power of each unit becomes almost totally undermined.
        Significantly Depreciate the value of money between when it is received and when it is spent.
      - Stabilising Money's Purchasing Power
        
        Rapid Inflation - rapid rise of price levels
        Lowering of money's purchasing power
        Results from rash economic policies, i.e. rapid increases in money supply
        
        Requires stabilizing the national price level
        
        Achievable through intelligent national monetary supply and interest rates, i.e. Monetary Policy
        
        Requires appropriate Fiscal Policy, supporting the Monetary Policy and hold down inflation