Econ 4.3

Wednesday, March 17, 1999

Announcements: Exam #3 has been rescheduled and will be held on Wednesday, April 7th instead of April 2nd as originally scheduled. Free tutoring at 220 Boucke (865-1841). Online Quizzes are up. All homework assignments have been posted on the website. There will be no final exam scheduled during the final exam dates.

Lecture notes:  

Introduction to Money and Banking

• Measuring GDP
• GDP = C + I + G + (EX - IM)
• GDP = PQ
• GDP = MV
• Origin of Fractional Reserve Banking
• Functions of Money
• Fiat Money
• Measuring Money Supply
• Sources of Money Creation
• Financial Itermediation
  • Money and Bank Balance Sheets
  • Money Multiplier
• Influencing Banking System Reserves
• Money Creation and Banking System

Measuring Money Supply

• Money suppyl has three major components
• M1 = currency held by nonbank public and traveler's checks and other checkable deposits in financial institutions
• M2 = M1 and noncheckable savings, time deposits (less than $100,000) and money market deposits and money market mutual funds
• M3 = M2 and large time deposits ($100,000 or more)
• Money in a bank is not part of the US money supply until it leaves the bank and goes into circulation
• Now Account: Negotiable order of withdrawal

Sources of Money Creation

• Private Banking System
• US Federal Reserve System
• US Treasury

Financial Intermediaries

• Commerical Bank
• Savings and Loans Associations
• Savings Banks
• Credit Unions
• Mutual Money Market Funds

Some "Balance Sheet" Accounting Relationships

• Net Worth = Assets - Liabilities
• Assets: All things of value owned
• Liabilities: all debts an institution has that they are liable to pay
• Assets = Liabilities + Net Worth

Balance Sheets

• Left Side contains assets
• Right Side contains liabilities

Initial Reserve Position

• Reserve Requirement: 10% of demand deposits

Reserve Position:

• Demand deposits $6,000
• Reserves Required $600
• Actual reserves $1,000
• Less Required reserves $600
• Free of excess reserves $400

Objective of Profit Maximizing Bank:

• Convert excess reserves into earning assets

Loaning of Banks "Excess Reserves"

• Loans approved ($millions)
• Computer Corp $50
• Nittany City $50
• Fox Construction $100

Lending Creates Money! "Money is debt!"

Reserve Positive after Loans

• Reserve Position
• Demand Deposits $6,200
• Reserves Required $620
• Actual Reserves $1,000
• Less Required Reserves $620
• Free or excess Reserves $380

Loan Repayment to Bank

• Loans repaid ($millions)
• Computer $25
• Nittany $25
• Fox $50

• Payment of debt destroys money
• Creation of debt creates money