money and banking winter 2012-13 day 1 dr. andrew l. h. parkes “a practical understanding for use...

Money and BankingMoney and BankingWinter 2012-13Winter 2012-13

Day 1Day 1

Dr. Andrew L. H. ParkesDr. Andrew L. H. Parkes““A Practical Understanding for use in Business”A Practical Understanding for use in Business”

卜安吉卜安吉

November 27, 2012November 27, 2012 Money and Banking, Day 1Money and Banking, Day 1 22

U.S. inflation and its trendU.S. inflation and its trend, 1960-, 1960-20062006

0%

3%

6%

9%

12%

15%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

long-run trend

% change in CPI from 12 months earlier


The connection between The connection between money and pricesmoney and prices

Inflation rateInflation rate = the percentage = the percentage increase increase in the average level of prices. in the average level of prices.

PricePrice = amount of money required to = amount of money required to buy a good. buy a good.

Because prices are defined in terms of money, we Because prices are defined in terms of money, we need to consider the nature of money, need to consider the nature of money, the supply of money, and how it is controlled.the supply of money, and how it is controlled.


What is Money: DefinitionsWhat is Money: Definitions

MoneyMoney is the stock is the stock of assets that can be of assets that can be readily used to make readily used to make

transactions.transactions.

1.

2. MoneyMoney is anything is anything that is generally that is generally

accepted in payment accepted in payment for goods and for goods and

servicesservices


What is Money…(cont.)What is Money…(cont.)It is important to distinguish between money, It is important to distinguish between money,

wealth and income:wealth and income:

MoneyMoney– StockStock

Wealth: Money + AssetsWealth: Money + Assets– StockStock

Income: earnings at a point in timeIncome: earnings at a point in time– FlowFlow

Flow Stock


Classifications of MoneyClassifications of Money In the United States:In the United States:

M1M1 = Currency + Traveler's Checks + Demand = Currency + Traveler's Checks + Demand Deposits + Other Checkable DepositsDeposits + Other Checkable Deposits

M2M2 = M1 + Small denomination time deposits & = M1 + Small denomination time deposits & repurchase agreements + Savings Deposits and repurchase agreements + Savings Deposits and money market deposit accounts + Money money market deposit accounts + Money Market mutual fund shares (noninstitutional)Market mutual fund shares (noninstitutional)

M3M3 = M2 + Large denomination time deposits and = M2 + Large denomination time deposits and repurchase agreements + Money Market mutual fund repurchase agreements + Money Market mutual fund shares (institutional) + Repurchase Agreements + shares (institutional) + Repurchase Agreements + EurodollarsEurodollars[Note: As of March 2006, the Fed has discontinued M3][Note: As of March 2006, the Fed has discontinued M3]

• See: See: http://www.federalreserve.gov/releases/h6/hist/http://www.federalreserve.gov/releases/h6/hist/


Money supply measures, Money supply measures, April April 20062006

$6799$6799

M1M1 + small time deposits, + small time deposits, savings deposits, savings deposits, money market mutual funds, money market mutual funds, money market deposit accountsmoney market deposit accounts

M2M2

$1391$1391CC + demand deposits, + demand deposits, travelers’ checks, travelers’ checks, other checkable depositsother checkable deposits

M1M1

$739$739CurrencyCurrencyCC

amount amount ($ billions)($ billions)assets includedassets includedsymbolsymbol


Money: FunctionsMoney: Functions Medium of ExchangeMedium of Exchange

we use it to buy stuffwe use it to buy stuff Store of ValueStore of Value

transfers purchasing power from the present transfers purchasing power from the present to the futureto the future

Unit of AccountUnit of Accountthe common unit by which everyone the common unit by which everyone measures prices and valuesmeasures prices and values

Money helps to:Money helps to:– Lower transaction costsLower transaction costs– Increase Liquidity in an economyIncrease Liquidity in an economy


Money as a Medium of Money as a Medium of ExchangeExchange

DefDef: A : A medium of exchangemedium of exchange is any is any object that is accepted in exchange for object that is accepted in exchange for goods and servicesgoods and services

Examples of medium’s of exchange:Examples of medium’s of exchange:BarterBarterCigarettes (WWII POW Camp)Cigarettes (WWII POW Camp)Credit CardCredit Card

BarterBarter – goods and services exchanged – goods and services exchanged directly for other goods and servicesdirectly for other goods and services– ““Double Coincidence of Wants”Double Coincidence of Wants”


Money as a Unit of AccountMoney as a Unit of Account

No unit of account:No unit of account:

Money as a unit of Money as a unit of account:account: The The opportunity cost of opportunity cost of one movie is 24 one movie is 24 sticks of gum.sticks of gum.

GoodGoodPrice in units of Price in units of another goodanother good

MovieMovie 2 six-packs of 2 six-packs of sodasoda

SodaSoda 2 ice-cream 2 ice-cream conescones

Ice CreamIce Cream 3 packs of jelly 3 packs of jelly beansbeans

Jelly BeansJelly Beans 2 sticks of gum2 sticks of gum

GumGum 1 local phone 1 local phone callcall


Money: TypesMoney: Types

1.1. Fiat MoneyFiat Money– has no intrinsic valuehas no intrinsic value– example: the paper currency we useexample: the paper currency we use

2.2. Commodity MoneyCommodity Money– has intrinsic valuehas intrinsic value– examples: examples:

gold coins, gold coins, cigarettes in P.O.W. camps (also in film: cigarettes in P.O.W. camps (also in film: TheThe Shawshank RedemptionShawshank Redemption starring Tim Robbins starring Tim Robbins and Morgan Freeman)and Morgan Freeman)


Evolution of Payments Evolution of Payments SystemSystem

Precious metals like gold and silver Precious metals like gold and silver ((commodity moneycommodity money))

Paper currency (Paper currency (fiat moneyfiat money))

ChecksChecks

Electronic means of paymentElectronic means of payment

Electronic money: Debit cards, Stored-Electronic money: Debit cards, Stored-value cards, Smart cards, E-cashvalue cards, Smart cards, E-cash


What can serve as money?What can serve as money?Commodities must satisfy the following Commodities must satisfy the following

properties to serve as money:properties to serve as money:

Widely acceptedWidely accepted

StandardizedStandardized

DivisibleDivisible

Easy to carryEasy to carry

Not deteriorate easilyNot deteriorate easily


Discussion QuestionDiscussion Question

Which of these are money? Which of these are money?

a.a. CurrencyCurrency

b.b. ChecksChecks

c.c. Deposits in checking accounts Deposits in checking accounts (“demand deposits”)(“demand deposits”)

d.d. Credit cardsCredit cards

e.e. CertificatesCertificates of deposit of deposit (“time deposits”)(“time deposits”)


Best Definition of Money…?Best Definition of Money…?What happenedto money in:

• 1968 – 71• Post 1989

Different stories about what happened to money


Reliability of Money DataReliability of Money Data

Problems arise Problems arise because:because:

Lack of frequency Lack of frequency in reporting in reporting depositsdeposits

Seasonal Seasonal variationsvariations

Focus on long run Focus on long run monetary monetary movements!movements!


The money supply and The money supply and monetary policy definitionsmonetary policy definitions

The The money supplymoney supply is the quantity of is the quantity of money available in the economy. money available in the economy.

Monetary policyMonetary policy is the control over is the control over the money supply. the money supply.

money and banking winter 2012-13 day 1 dr. andrew l. h. parkes “a practical understanding for use...

Documents

supply of money

paymentelectronic money

money assetsstockincome

nature of money

terms of money

money supply measures

agreements savings deposits

value cards