Unit 4: Money and Money Market

• Uses of money
• Medium of Exchange (barter/trade)
• Unit of Account (economic value/money’s worth)
• Store of Value (what is the money’s value over time/where is it?)
• Types of money
• Commodity Money (gold/silver: a product)
• Representative Money (IOU)
• Fiat Money (Government money)
• Characteristics of money
• Durability
• Portability
• Divisability
• Uniformity
• Scarctiy
• Acceptability

• Money Supply
• Determined by Fed because of monopoly over money supply (vertical curve)
• Also vertical because it is independent of the interest rate
• M1
• Cash, coins, currency, traveler's checks, and demand or checkable deposits(largest component)
• 75% of transactions in the economy
• M2
• M1 + Savings Account
• M3
• M2 + Money Market Account + CD's (Certificate of Deposit)

• Liquidity
• Easy to convert to cash
• M2 & M3 (M1, major component, not included)

• Balance sheet: T account, t-chart. Summarizes the financial position of a bank, at a certain time.

• Asset(own)-
• RR(required reserves )
• ER(excess reserve)
• Bank Propensity
• Securities and bonds
• Loans 
• Liabilities(owe)-
• DD, CD- Checking accts
• Net worth or owner’s equity 
• Fractional reserve banking system: banks have to keep a fraction of the total money supply that is held in reserve as currency. The bank should keep a fraction of the money that they get in.
• RR+ER=DD

• Money market: It is the market where the fed and the user of money interact thus determining the nominal interest rates. 
• Money demand comes from households firms, the government and the foreign sector. 
• The money supply is determined only by the federal reserve bank
• Two type of Money Demand: 
• Transaction demand: demand for money as a medium of exchange
• Asset demand: Demand for money as a store of value. It is dependent upon the interest rate
• Money demand: downward sloping because at high interest rates people are less inclined to hold money and more inclined to hold stocks and bonds.
• Money supply: determined by the fed, because the fed has a monopoly over money supply. This is why money supply has a vertical curve.Also vertical because it is independent of the interest rate.
•  Expansionary monetary policy
• MS will shift right 
•  i decreases
• Discount rate(decrease)
• Reserve ratio(Decrease)
• Buy bonds(more money)
• MS increase 

• Contractionary monetary policy
• MS will shift left
• i increases 
• Discount rate (increase)
• Reserve ratio(increase)
• Sell bonds(less money) 
• MS decreases 

• Loanable funds: The market where buyers and savers meet to exchange funds at the real interest rate. Both the demand and supply for loanable funds comes from households, firms the government, and the foreign sector