© 2007 worth publishers essentials of economics krugman wells olney prepared by: fernando &...

© 2007 Worth Publishers Essentials of Economics Krugman • Wells • Olney

Prepared by:

Fernando & Yvonn Quijano

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The Meaning of Money

A household’s wealth is the value of its accumulated savings.

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Money is any asset that can easily be used to purchase goods and services.

What Is Money?

Currency in circulation is cash held by the public.

Checkable bank deposits are bank accounts on which people can write checks.

The money supply is the total value of financial assets in the economy that are considered money.

An asset is liquid if it can be quickly converted into cash without much loss of value.

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A medium of exchange is an asset thatindividuals acquire for the purpose oftrading rather than for their own consumption.

Roles of Money

Medium of Exchange

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A store of value is a means of holdingpurchasing power over time.

Roles of Money

Store of Value

A unit of account is a measure usedto set prices and make economic calculations.

Unit of Account

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Commodity money is a good used as amedium of exchange that has other uses.

Types of Money

A commodity-backed money is a medium of exchange with no intrinsic value whose ultimate value is guaranteedby a promise that it can be converted into valuable goods.

Fiat money is a medium of exchangewhose value derives entirely from itsofficial status as a means of payment.

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A monetary aggregate is an overallmeasure of the money supply.

Measuring the Money Supply

Near-moneys are financial assets thatcan’t be directly used as a medium ofexchange but can be readily convertedinto cash or checkable bank deposits.

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Measuring the Money Supply

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The Monetary Role of Banks

What Banks Do

A bank is a financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance the illiquid investments or investment spending needs of borrowers.

A financial intermediary is an institution that transforms the funds it gathers from many individuals into financial assets.

A bank deposit is a claim on a bank that obliges the bank to give the depositor his or her cash when demanded.

Bank reserves are the currency banks hold in their vaults plus their deposits at the Federal Reserve.

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What Banks Do

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What Banks Do

The reserve ratio is the fraction of bankdeposits that a bank holds as reserves.

An asset is a claim that provides income in the future.

A liability is a requirement to pay in the future.

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The Problem of Bank Runs

A bank run is a phenomenon in whichmany of a bank’s depositors try to withdraw their funds due to fears of a bank failure.

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Bank Regulation

Deposit insurance guarantees that abank’s depositors will be paid even if thebank can’t come up with the funds, up toa maximum amount per account.

Deposit Insurance

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Bank Regulation

To reduce the incentive for excessive risk taking, regulators require that the owners of banks hold substantially more assets than the value of bank deposits.

Capital Requirements

Reserve Requirements

Reserve requirements are rules set bythe Federal Reserve that determine theminimum reserve ratio for a bank.

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How Banks Create Money

Excess reserves are a bank’s reserves over and above its required reserves.

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The Federal Reserve System

The Fed: America’s Central Bank

A central bank is an institution thatoversees and regulates the banking system and controls the monetary base.

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What the Fed Does: Reserve Requirements and theDiscount Rate

The federal funds market allows banks that fall short of the reserve requirement to borrow funds from banks with excess reserves.

The federal funds rate is the interest rate determined in the federal funds market.

The discount rate is the rate of interest the Fed charges on loans to banks.

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Open-Market Operations

An open-market operation is a purchase or sale of government debt by the Fed.

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Monetary Policy and Aggregate Demand

Expansionary and Contractionary Monetary Policy

The target federal funds rate is the Federal Reserve’s desired federal funds rate.

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Expansionary monetary policy is monetary policy that increases aggregate demand.

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Contractionary monetary policy is monetary policy that reduces aggregate demand.

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Monetary Policy and the Multiplier

(18-1)MPC

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1 x

© 2007 worth publishers essentials of economics krugman wells olney prepared by: fernando &...

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