MONEY AND THE BANKING SYSTEM

By : Nguyen vu nguc tu-Liu fei yan-Winata Setiawan Lingga-Riandy angdinata

Abdul khaer-Jia Mengchen-Jefano ridhany

The Nature of Money

Barter versus Monetary Exchange
Money greases the wheels of exchange, and thus makes the whole economy more productive

The Conceptual Definition of Money

Money is the standard object used in exchanging goods and services.in short, money is the medium of exchange

What serves as money?

commodity money is an object in use as medium of exchange,but which also has a substantial value in alternative (non monetary) use Fiat money is money that decreed as such by the government.it is of little value as a commodity ,but it maintains its value as a medium of exchange beause people have faith that the issuer will stand behind the pieces of printed paper and limit their production

How the Quantity of Money is measured

M1
The narrowly defined money supply,usually abbreviated M1 , is the sum of all coins and paper money in circulation,plus certain checkable deposit balances at banks and savings institutions

M2
The broadly defined money supply,usually abbreviated M2,is the sum of all coins and paper money in circulation,plus all types of checking account balances,plus most forms of saving account balances,plus shares in money market mutual funds

Other definitions of the money supply

Money consists only of coins ,paper money ,and checkable deposit

The Banking System

How Banking Began
Bank profitability Bank discretion over the money supply Exposure to runs

Principles of bank management :profit versus safety

The art of banks management is to strike the appropiate balance between the lure of profits and the need for safety.if a banker errs by being too stodgy,his bank will earn inadequate profits.if he errs by taking unwarranted risks,his bank may not survive at all

Bank Regulation
Deposit insurance Bank supervision Rreserve requirement

The Origins of the Money Supply

How Bankers keep book

Assets = Liabilities + net worth

Net worth is he value of all assets minus the value of al liabilities

Banks and Money Creation

The limits to money creation by a single bank
Excess reserves, are any reserves held in excess of the legal minimum

Multiple money creation by series of banks

Infinitive geometric progession =

1 + + 2 + 3 + . . . =

1 1

R = common ratio

Oversimplified money multiplier formula

If the required reserve ratio is some fraction, m,the banking system as a whole can convert each $1 of reserves into $1/m in new money.that is,th so-called money multiplier is given by:

Change in money supply = (1/m) x change in reserves

Money multiplier is the ratio of newly created bank deposits to new reserves

Why the money creation formula is oversimplified

If individuals and business firms decide to hold more cash ,the multiple expansion of bank deposits will be curtailed because fewer dollars of cash will be available for use as reserves to support checking deposits.consequently,the money supply will be smaller If banks wish to keep excess reserves,the multiple expansion of bank deposits will be restricted. A given amount of cash will support a smaller supply of money than would be the case if banks held no excess reserves

The need for Monetary policy

During a recession ,profit-oriented banks would be prone to reduce the money supply by increasing their excess reserves and declining to lend to less creditworthy applicants-if the government did not intervene as we will learn in subsequent chapters,the moneyh supply is an important influence on aggregate demand ,so such a constraction of the money supply would aggravate the recession. During an econimoic boom ,profit-oriented banks will likely make the money supply expand,adding undesirable momentum to the booming economy and paving the way for inflation .the authorities must intervene to prevent this rapid money growth.