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WHAT IS MONEYThe Economics of Money, Banking, and Financial Markets, 8th edition Frederic S. Mishkin

Why should I take this course?

For econ majors, this course relates to macroeconomics, international trade, and growth and development For business majors, constantly will be confronted with financial decisions For all other majors, we are all affected by the monetary system: you have checking accounts, will likely buy insurance, have mutual funds, etc.

THE GLOBALIZATION OF MONEY, BANKING, AND FINANCIAL MARKETS

Changes in the diverse markets in which multinational firms operate affect the financial institutions that serve those firms. The blending of domestic and global financial markets has increased international competition among financial institutions.

MONEY AND BANKING IN THE DIGITAL AGE

Cybertechnologies:

Technologies that connect savers, investors, traders, producers, and governments via computer linkages.

MONEY AND BANKING IN THE DIGITAL AGE

Implications of cyber technologies: Major changes for both banks and their customers: more online banking, customers will have more services on their home computers

Policymakers are affected: the nature of money is changing, what kinds of new regulations will be needed?

MEANING OF MONEYthat is generally accepted in payment for goods or services or in the repayment of debt. Distinct from income and wealth Anything

FUNCTION OF MONEYMedium of Exchange Unit of Account Store of Value Standard of Deferred Payment

THE DESIRABLE PROPERTIES OF MONEY

1. 2. 3. 4. 5.

Portability Durability Divisibilty Standardizability Recognizability

EVOLUTION OF THE PAYMENTS SYSTEMCommodity Money ->metal such as precious metal or another valuable commodity. The problem, is money , very heavy, hard to transport. Fiat Money -> paper currency -> legal tender

METHODS OF EXCHANGE AND THE EVOLUTION OF MONEY

Barter and the double coincidence of wants:

Before money there was barter: trading products for products. This requires a double coincidence of wants, which means two individuals are simultaneously willing and able to make a trade; we each have what the other wants. A good with a nonmonetary value that is also used as money.

Commodity money:

METHODS OF EXCHANGE AND THE EVOLUTION OF MONEY

Commodity standard:

A money unit whose value is backed by the value of another physical good such as gold or silver. A token that has value only because it is accepted as money. (most money today is fiat money) Money that people can transfer directly via electronic impulses.

Fiat money:

Electronic money (e-money):

TYPES OF MONEY

I. Commodity Money a. Full-bodied money b. Representative full bodied money II. A. Issued by Government and Central Bank 1. Token Money 2. Paper B. Issued by Depository Institutions 1. Bank Notes 2. Demand deposits

Types of Money

Iron Copper Brass Wine Corn Salt Horses Sheep Goats Tortoise shell Porpoise teeth Whale teeth

Boar tusk Playing cards Red woodpecker scalps Leather Feathers Gold Glas Silver Polished beads (wampum) Knives Rum Pots Molasses Boats Tobacco Pitch Agricultural implements Rice Round stones with centers removed Cows Crystal salt bars Paper Snail shells Cigarettes

ELECTRONIC MONEY : A COMING GLOBAL PHENOMENA

Electronic money is money that stored electronically and it takes several forms. Debit Cards Stored-Value Card Electronic cash Electronic Checks

COMMODITY MONEY STANDARDS

Purchasing power of money:

The value of money in terms of the amount of real goods and services it buys. A monetary system in which the value of money is linked to the value of gold. A monetary system in which the value of money depends on the values of two precious metals, such as gold and silver.

Gold standard:

Bimetallic standard:

COMMODITY STANDARDS

Gold bullion:

Within a gold standard, the amount of gold used as money. A base amount of money that serves as the foundation for a nation s monetary system. Under a gold standard, the amount of gold bullion is the monetary base In a fiat money system, the sum of currency in circulation plus reserves of banks and other depository institutions is the monetary base.

Monetary base:

THE MOVE TO FIAT MONEY

After 1971, the U.S. renounced the gold standard. Other nations followed.

In some countries that have resorted to excess printing of money, this has led to high rates of inflation.

E-MoneyPerhaps the future of money, uses microchips to store money values. Check out http://www.e-gold.com/

MONEY IN CIRCULATION: WHAT DO WE COUNT?

Liquidity:

The ease with which an asset can be sold or redeemed for a known amount of cash at short notice and at low risk of loss of nominal value. A grouping of assets sufficiently liquid to be defined as a measure of money.

Monetary aggregate:

MEASURING MONEY

M1, which includes currency, checking account deposits and travelers check. M2, aggregate to M1 other assets that have money market deposit account and money market mutual find shares, small denomination time deposits, saving deposits, overnight repurchase agreement. M3, monetary aggregate adds to M2 somewhat less liquid assets such as large denomination, term repurchase agreements, and institutional money market fund shares.

MEASURES OF THE MONETARY AGGREGATESM1= Currency Traveler s cheks Demand deposits Other checkable deposits Total M 1 M2 = M1 + ( The liquidity approach ) (Transaction Approach}

Small-denomination time deposits Saving deposits and money market deposits accounts Money market mutual fund shares (noninstitutional) Total M2

M3 = M2 + Large denomination time deposits Money Market mutual fund shares Term repurchase agreements Term Eurodollars Total M3

THE MONETARY BASE

Currency:

Coins and paper money. Financial institutions that issue checking and savings deposits that are included in measures of money and that legally must hold reserves on deposit with Federal Reserve banks or in their vaults. Cash held by depository institutions in their vaults or on deposit with the Federal Reserve System. Monetary base equals currency plus these reserves.

Depository financial institutions:

Reserves:

M1: A BASIC DEFINITION OF

|CASH}

M1:

Currency, traveler s checks, and transactions deposits.

Transactions deposits (checking accounts):

Demand deposits:

Non-interest-bearing checking accounts.

Negotiable-order-of-withdrawal (NOW) accounts:

Interest-bearing checking deposits. An interest-bearing savings account and noninterest-bearing checking account.

Automated-transfer-system (ATS) account:

COMPONENTS OF THE MONETARY BASE AND M1 ($ BILLIONS)

M2: CASH PLUS OTHER LIQUID ASSETS

M2:

M1 plus savings and small-denomination time deposits and balances of individual and broker-dealer money market mutual funds. Savings deposits:

Interest-bearing savings accounts without set maturities. Savings accounts with limited checking privileges. Deposits with set maturities and denominations of less than $100,000.

Money market deposit accounts:

Small-denomination time deposits:

M2: CASH PLUS OTHER LIQUID ASSETS M2:

M1 plus savings and small-denomination time deposits and balances of individual and broker-dealer money market mutual funds. Savings deposits:

Interest-bearing savings accounts without set maturities. Savings accounts with limited checking privileges. Deposits with set maturities and denominations of less than $100,000.

Money market deposit accounts:

Small-denomination time deposits:

THE COMPONENTS OF M2 ($ BILLIONS)

M1 Small-denomination time Deposits Savings deposits and money market deposits Individual and broker-dealer money market mutual funds M2

$1,365.1 867.0 3,574.8 707.8 $6,514.7

M3: THE BROADEST MONETARY AGGREGATE

M3:

M2 plus large-denomination time deposits, Eurodollars and repurchase agreements, and institution-only money market mutual funds. Large-denomination time deposits:

Deposits with set maturities and denominations greater than or equal to $100,000. Contracts to sell financial assets with a promise to repurchase them at a later time. Dollar-denominated deposits located outside the U.S.

Repurchase agreements:

Eurodollars:

THE COMPONENTS OF M3 ($ BILLIONS)

M2 $6,514.2 Large-denomination time deposits 1,203.4 Repurchase agreements and Eurodollar deposits 853.6 Institution-only money market mutual funds 1,039.3 M3 $9,611.0

ANNUAL GROWTH RATES OF M1 AND M2.

Money in the Digital Economy

Nonelectronic paymentsCurrency Credit-card Money orders

Electronic payments

Wire transfers: Payments made via telephone lines or through fiberoptic cables.

ELECTRONIC VERSUS NONELECTRONIC PAYMENTS

MONEY IN THE DIGITAL ECONOMY

Electronic

Payments (cont d)

Automated clearinghouses: Institutions that process payments electronically on behalf of senders and receivers of those payments. Point-of-sale (POS) transfer: Electronic transfer of funds from a buyer s account to the firm from which a good or service is purchased at the time the sale is made. Automated bill payment: Direct payment of bills by depository institutions on behalf of their customers.

MONEY IN THE DIGITAL ECONOMYComputer shopping

Internet-based financial exchanges Innovations in electronic payments technology As assets become more liquid, the meaning a