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Bitcoin
Ted Talk
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Anything widely used and freely accepted as payment for goods and services
What Is Money?
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The Functions of Money
Medium of Exchange
Store of Value
Unit of Account/
Measure of Value
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Portability
Divisibility
Durability
Recognizable
Relative scarcity
What Is Money?
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The Cost of Producing U.S. Coins
Golden Dollar 10.03 cents
Half Dollar 9.93 cents
Quarter 4.29 cents
Dime 1.88 cents
Nickel 3.13 cents
Penny .81 cents
Source: http://www.usmint.gov/faqs/circulating_coinsSource: http://www.usmint.gov/faqs/circulating_coins
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Commodity – money with intrinsic value
Representative – convertible or commodity-backed money
Fiat – value derived from official status, acceptability
Kinds of Money
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Just How Much Is a Ton of Money Worth?The Time Value of Money
Dollar Bills $908,000
Quarters $40,000
Pennies $3,632
Source: State of Michigan Office of Financial and Insurance Services, Source: State of Michigan Office of Financial and Insurance Services, www.cis.state.mi.us/ofic/consumer/kids/ton_money www.cis.state.mi.us/ofic/consumer/kids/ton_money
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The Money Supply
M1: SpendableCurrency
Demand deposits
M2: Spendable plus Convertible(M1 + near money)
Time deposits
Money market mutual funds
Savings deposit
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More than half of the M1 is currency
The rest is demand deposits
The Monetary Role of BanksThe Monetary Role of Banks
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What Banks DoWhat Banks Do
•Financial Intermediary
•Bank Reserves
•T - Account
Assets & Liabilities
•Reserve Ratio
•Required Reserve Ratio
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The Problem of Bank RunsThe Problem of Bank Runs
•Customer Deposits > Bank Reserves
•Why does this usually work?
•Bank Run
•Why?
•Bank Failure
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Bank RegulationBank Regulation
•Deposit Insurance
•FDIC
•Capital Requirements
•Reserve Requirements
•The Discount Window
14 - 14 - 151519641964 19691969 19741974 19841984 19841984 19891989 19941994 20012001
5.45.4
5.05.0
4.44.4
4.04.0
3.43.4
3.03.0
2.42.4
2.02.0
1.41.4
1.01.0
00
0.40.4
Mo
ne
y S
upp
ly (
trill
ion
s)M
on
ey
Sup
ply
(tr
illio
ns)
Money Supply Growth
M-1M-1
M-2M-2
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Determining the Money SupplyDetermining the Money Supply
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How Banks Create MoneyHow Banks Create Money
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Reserves, Bank Deposits, andReserves, Bank Deposits, and the Money Multiplier the Money Multiplier
•“Leaks”
•Excess Reserves
•rr = reserve ratio
•Loan Expansion = Excess Reserves / rr
MM = 1/rrMM = 1/rr
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The Money Multiplier in RealityThe Money Multiplier in Reality
•Monetary Base
•Money Multiplier
Each dollar of bank reserves backs Each dollar of bank reserves backs several dollars of bank deposits, several dollars of bank deposits, making the money supply larger making the money supply larger than the monetary base.than the monetary base.
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Table 25.1 How Banks Create MoneyRay and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers
Assumes a reserve ration of 10%Assumes a reserve ration of 10%
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Figure 25.3 Effect on the Money Supply of Turning Cash into a Checkable Deposit at First Street BankRay and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers
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Insert Federal Reserve here
The Money Market(Supply and Demand for Money)
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Demand for Money
Transactions Demand – medium of exchange demand; directly related to changes in nominal GDP
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Demand for Money cont.
Asset Demand – store of value demand; inversely related to the interest rate
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Demand for Money cont.
Total Money Demand – transaction + asset directly related to nominal GDP
The Demand for MoneyAt any given time, people demand a certain amount of liquid assets (money) for everyday purchases
The Demand for money shows an inverse relationship between nominal interest rates
and the quantity of money demanded1. What happens to the quantity demanded of money when interest rates increase?
Quantity demanded falls because individuals would prefer to have interest earning assets instead2. What happens to the quantity demanded when interest rates decrease?Quantity demanded increases. There is no incentive
to convert cash into interest earning assets 27
Nominal Interest Rate
(ir)
Quantity of Money(billions of dollars)
20%
5%
2%
0
DMoney
Inverse relationship between interest rates and the quantity of money demanded
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The Demand for Money
Quantity of Money(billions of dollars)
20%
5%
2%
0
DMoney
What happens if price level increase?
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The Demand for Money
DMoney1
Money Demand Shifters1. Changes in price level2. Changes in income3. Changes in taxation
that affects personal investment
Nominal Interest Rate
(ir)
The Demand for MoneyAt any given time, people demand a certain amount of liquid assets (money) for everyday purchases
The Demand for money shows an inverse relationship between nominal interest rates
and the quantity of money demanded1. What happens to the quantity demanded of money when interest rates increase?
Quantity demanded falls because individuals would prefer to have interest earning assets instead2. What happens to the quantity demanded when interest rates decrease?Quantity demanded increases. There is no incentive
to convert cash into interest earning assets 30
200
DMoney
SMoneyThe FED is a nonpartisan
government office that sets and adjusts the money supply to
adjust the economy
This is called Monetary Policy.
The U.S. Money Supply is set by the Board of Governors of the Federal Reserve System (FED)
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The Supply for Money
20%
5%
2%
Quantity of Money(billions of dollars)
Interest Rate (ir)
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Why are there so many interest rates?
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