The Monetary System

What are the 4 functions of money.

Item that buyers give to sellers when they want to
purchase goods and services.

Yardstick people use to post prices and record
debts.

Item that people can use to transfer purchasing
power from the present to the future

Timeline of the evolution of money

Types of commodity money

Is a monetary system involving the use of two metals, prominently the gold and silver.

Arguments in favor of bimetallism

A monetary system which uses pure gold as the standard value for the currency of the country. The value of country’s currency is pegged to or defined in terms of set price of the gold.

Is currency that a government has declared to be legal tender, but it is not backed by a physical commodity.

Its value is derived  from the relationship between supply and demand rather than the value of the material from which the money is made.

2 Kinds of Money

Takes a form of a commodity with intrinsic value.

Money without intrinsic value, used as money because of government decree.

What are the characteristics of money.

Willingness to accept the money in exchange for goods and services.

Means that the supply of money should be relatively limited for it to be valuable.

Anything that is used as money must be able to withstand the wear and tear when it passed fro one hand to another.

The commodity that is used as money must be handy because individual need to carry money along.

The commodity from which the money is made must be the same wherever the money is found.

Means the possibility of a commodity to be divided into smaller
denominations w/out destroying its value

Money must be easily recognized.

Refers to the ability to be changed into coins or bills of smaller denominations.

Quantity of money available in the economy.

Paper bills and coins in the hands of (non-bank) public.

Balances in bank accounts that depositors can access on demand by writing a check.

Composition of the supply of money

Money Supply is equal to...

He said, "People hold money for various reasons".

Motives why people hold money.

To meet day to day transactions like payments for goods &
services they buy.

To meet unforeseen events. (Emergency funds)

One form of wealth and assets.

This states that there is direct proportional relationship between money supply and the price level.

Quantity theory of money equation

Is the total paper bills, coins, and cheques in circulation, and near monies.

Refers to the number of times a given stock of money is circulated to support the annual flow of goods and services.

The unwarranted increase in money stock leads to ______.

Equation that shows that money stock and the price level are directly proportional.

Institution that oversees the banking system and regulates the money supply.

Setting of the money supply by policymakers in the central bank.

Banks keep a fraction of deposits as reserves and use the
rest to make loans.

They establish reserve requirements. Regulations on the minimum amount of reserves that banks must hold against deposits.

What is the reserve ratio?

Amount of money in the banking system generates with each dollar of reserves.

Besides reserves and loans, banks also hold
securities.

Besides deposits, banks also obtain funds from issuing debt and equity.

The resources a bank obtains by issuing equity to its owners.

A government regulation that specifies a minimum amount of capital, intended to ensure banks will be able to pay off depositors and debts.

The use of borrowed funds to supplement existing funds for investment purposes.

Banks suffered losses on mortgage loans and mortgage-backed securities due to widespread defaults. Many banks became insolvent:
-In the U.S., 27 banks failed during 2000–2007,
-166 during 2008–2009.

Many other banks found themselves with too little capital, responded by reducing lending, causing a credit crunch.

Ratio of assets to bank capital.

The Central Bank can change the money supply by...

The purchase and sale of government bonds by the Central Bank.

The Central Bank does not control

Interest rate at which banks make overnight loans to one another

____ has excess reserves
____ needs reserves

A change in federal funds rate...