Find the adjacency matrix of the graph in Fig. 476.
Week 12 April 13th April 20th Spring 2016 Money and Prices in the Long Run Chapter 16 Notes The Monetary System ● Barter Economy ○ “Double coincidence of wants.” ● Money ○ Set of assets in an economy that people regularly use to buy goods and services from other people. ● The Functions of Money ○ Medium of exchange. ○ Unit of account. ○ Store of value. ○ Means of deferred payment. ● Money is a subset of wealth. It is the only thing that can be exchanged for goods universally. ● Medium of Exchange ○ Item that buyers give to sellers when they want to purchase goods and services. ● Unit of Account ○ Yardstick people use to post prices and record debts. ● Money eliminates the coincidence of wants! ● Store of Value ○ Item that people can use to transfer purchasing power. ■ From the present to the future. ● Means of Deferred Payments; ○ You settle your debts with money. ● Liquidity ○ Ease with which an asset can be converted into the economy’s medium of exchange. ● Commodity Money ○ Money that takes the form of a commodity with intrinsic value. ■ Ex. Gold, cigarettes, etc. ● Intrinsic Value ○ Item would have value even if it were not used as money. ● Gold Standard Gold as money ○ Or paper money that is convertible into gold on demand. ● Fiat Money ○ Money without intrinsic value. Notes Key Boldedtexts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided by instructor. Week 12 April 13th April 20th Spring 2016 ○ Used as money because of government decree. ○ “This note is legal tender for all debts, public and private.” ● Fiat an order or decree. ● Money Stock ○ Quantity of money circulating in the economy . ● Currency ○ Paper bills and coins in the hands of the public. ● Demand Deposits ○ Balances in bank accounts; depositors can access on demand by writing a check. ● Measures of Money Stock ○ M1 ■ Demand deposits. ■ Traveler’s checks. ■ Other deposits. ■ Currency. ○ M2 ■ Everything in M1. ■ Saving deposits. ■ Small time deposits. ■ Money market mutual funds. ■ A few other minor categories. ● The Federal Reserve (The Fed) ○ The central bank of the U.S. ● Central bank ○ Institution designed to ■ Oversee the banking system. ■ Regulate quantity of money in economy. ● Federal Reserve ○ Created in 1913 ○ After a series of bank failures in 1907 it was established. ○ Purpose: to ensure the health of the nation’s banking system. ● Board of Governors ○ Seven members, 14year terms. ■ Appointed by the president and confirmed by the Senate. ○ The chairman ■ Directs the Fed staff. ■ Presides over board meetings. ■ Testifies regularly about Fed policy in front of congressional committees. Notes Key Boldedtexts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided by instructor. Week 12 April 13th April 20th Spring 2016 ■ Appointed by the president by 4year (renewable) terms. ● The Federal Reserve System ○ Fed Reserve board in Washington, D.C. ○ 12 regional Federal Reserve banks. ■ Major cities around the country. ■ The presidents are chosen by each bank’s board of directors. ● The Fed’s Job ○ Regulate banks and ensure the health of the banking system. ■ Regional Federal Reserve Banks. ■ Monitors each bank’s financial condition. ■ Facilitates bank transactions clearing checks. ■ Acts as a bank’s bank. ■ The Fed lender of lost resort. ○ Control money supply. ■ Quantity of money available in the economy. ■ Monetary policy. ● By Federal Open Market Committee (FOMC). ● Money Supply ○ Quantity of money available in economy. ● Monetary Policy ○ Setting of the money supply. ● FOMC ○ Seven members on the board of governors. ○ 5 of 12 regional bank presidents. ■ All 12 regional presidents attend an FOMC meeting, but only 5 get to vote. ○ Meets about every six weeks in D.C. ○ Discuss the condition of the economy. ○ Consider changes in monetary policy. ● Fed’s primary tool: openmarket operations. ○ Openmarket operations The buying and selling of U.S. government bonds. ● FOMC decrease the money supply. ○ The Fed: Openmarket sale. ● FOMC increase the money supply. ○ The Fed: Openmarket purchase. ● The Fed does not issue bonds, only trades them! ● Money ○ Currency and demand deposits. Notes Key Bolded texts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided y instructor. Week 12 April 13th April 20th Spring 2016 ● Behavior of Banks ○ Can influence the quantity of demand deposits in the economy (and the money supply). ○ ∴Money Supply = Currency + Demand Deposits ● Reserves ○ Deposits that banks have received but have not loaned out. ● The simple case of 100% reserve banking ○ All deposits are held as reserves. ● Banks do not influence that supply of money. ● FractionalReserve Banking ○ Banks hold only a fraction of deposits as reserves. ● Reserve Ratio ○ Fraction of deposits that banks hold as reserves. ● Reserve Requirements ○ Minimum amount of reserves that banks must hold; set by the Fed. ○ ∴Funds to cover withdrawals. ● Excess Reserve ○ Banks may hold reserves above the legal minimum. ■ Ex. First National Bank Reserve ratio of 10%. ○ Commonly occurs during seasonal holidays or when economy is not as reliable (people are less likely to pay). 1 ● The money multiplier = wherR R is the required reserve. ○ Ex. Started $100 → Bank (x 10) → $1000 ○ R = 10% therefore multiplier is 0.1 vs. 10 or 1/10. ○ Amount of money the banking system generates with each dollar of reserves. 1 ○ ∴Reciprocal of the reserve ratio = R ● The higher the reserve ratio ○ The smaller the money multiplier. ● Banks DO NOT CREATE WEALTH! ○ Though they increase supply of money, they create equal amounts of debt for those they loan to; thus an equilibrium. ● Bank Capital ○ Resources a bank’s owners have put into the institutions. ○ Used to generate profit. ● Assets and Liabilities must be equal! ● “When banks assets don’t alleviate liabilities the bank is insolvent.” ○ From here they can only apply for a loan from the Fed or be dissolved and have all their assets sold. Notes Key:Bolded texts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided b instructor. Week 12 April 13th April 20th Spring 2016 ○ Good reason put your money in multiple banks. Assets Liabilities Reserves Deposits Loans Debt Securities Capital (Owners’ Equity) ● Leverage ○ Use of borrowed money to supplement existing funds for purposes of investment. ● Leverage Ratio ○ Ratio of assets to bank capital. Assets ○ Leverage Ratio = Bank Capital ● Capital Requirement ○ Government regulation specifying a minimum amount of bank capital. ● Influences the quantity of reserves. ○ Openmarket operations. ○ Fed lending to banks. ● Influences the reserve ratio. ○ Reserve requirements. ○ Paying interest on reserves. ● Openmarket Operations ○ Purchase and sale of U.S. government bonds by the Fed. ○ To increase the money supply. ■ The fed buys U.S. government bonds. ○ To reduce the money supply (Ex. Inflation) ■ The Fed sells U.S. government bonds. ○ Easy to conduct. ○ Used more often. ● Fed lending to banks ○ To increase the money supply. ○ Discount window. ■ At the discount rate. ○ Term Auction Facility ■ The highest bidder. ● The Fed determines the discount rate. ○ The Fed sets a quantity of funds it wants to lend to banks. Notes Key:Bolded texts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided by instructor. Week 12 April 13th April 20th Spring 2016 ○ Eligible banks can bid to borrow those funds. ○ Loans go to the highest eligible bidder. ■ Acceptable collateral. ■ Pay the highest interest rate. ● Reserve Requirements ○ Minimum amount of reserves that banks must hold against deposit. ■ An increase in reserve requirements. ● Decrease in money supply. ■ A decrease in reserve requirements. ● Increase the money supply. ○ Used rarely disrupt business of banking. ○ Less effective in recent years. ■ Many banks hold excess reserves. ● Paying Interest on Reserves ○ Since October 2008. ○ The higher the interest rate on reserves. ■ The more reserves banks will choose to hold. ○ An increase in the interest rate on reserves. ■ Increase the reserve ratio. ■ Lower the money multiplier. ■ Lower the money supply. ● The Fed’s control of the money supply ○ Not precise. ● The Fed does not control: ○ The amount of money that households choose to hold as deposits in banks. ○ The amount that bankers choose to lend. ● The Federal Funds Rate ○ Interest rate at which banks make overnight loans to one another. ■ Lender has excess reserves. ■ Borrower need reserves. ○ A change in federal fund rate. ■ Changes other interest rates. ● Fed reserve bank does not determine the federal fund rate. ● The Fed: target the federal funds rate. ○ Openmarket operations. ■ The Fed buys bonds. ● Decrease in the federal funds rate. ● Increase in the money supply. Notes Key:Bolded texts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided b instructor. Week 12 April 13th April 20th Spring 2016 ■ The Fed sells bonds. ● Increase in the federal funds rate. ● Decrease in the money supply. ● Federal funds do not come from Fed but banks to banks. Notes Key:Bolded texts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided by instr ctor.